Convertible Security

What is a 'Convertible Security'

A convertible security is an investment that can be changed into another form. The most common convertible securities are convertible bonds or convertible preferred stock, which can be changed into equity or common stock. A convertible security pays a periodic fixed amount as a coupon payment (in the case of convertible bonds) or a preferred dividend (in the case of convertible preferred shares), and specifies the price at which it can be converted into common stock.

BREAKING DOWN 'Convertible Security'

Convertible securities usually have a lower payout than that offered by comparable securities that do not have the conversion feature. Investors are willing to accept the lower payout because of the conversion feature, which is tantamount to a call option on the common stock. The conversion price - the preset price at which the security can be converted into common stock - is usually set at a price significantly higher than the stock's current price.


The performance of a convertible security is heavily influenced by the price of the underlying common stock. The degree of correlation increases as the stock price approaches or exceeds the conversion price. Conversely, if the stock price is languishing far below the conversion price - a busted convertible in market parlance - the security will likely trade as a straight bond or preferred share, since the prospects of conversion are viewed as remote.

RELATED TERMS
  1. Market Conversion Price

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  3. Conversion Value

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  4. Conversion Parity Price

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  5. Deferred Equity

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  6. Conversion Price

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RELATED FAQS
  1. What is a 'busted' convertible bond?

    Learn about busted convertible bonds; these are hybrid securities with conversion prices significantly higher than the market ... Read Answer >>
  2. What is the difference between convertible and reverse convertible bonds?

    The difference between a regular convertible bond and a reverse convertible bond is the options attached to the bond. While ... Read Answer >>
  3. Where does the stock come from when convertible bonds are converted to stock?

    First, let's define convertible bonds. A unique combination of debt and equity, they provide investors with the chance to ... Read Answer >>
  4. Why do some investors prefer convertible over “straight” bonds?

  5. What is a Chinese hedge?

    A Chinese Hedge is a form of arbitrage by which an investor shorts a convertible bond and buys the underlying common stock. ... Read Answer >>
  6. Do convertible bonds have voting rights?

    Convertible bonds usually have no voting rights until they are converted. Even after conversion, they may not be granted ... Read Answer >>
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