Convertible Subordinate Note

DEFINITION of 'Convertible Subordinate Note'

A short-term debt security that can be changed into common stock. A convertible subordinate note is a short-term bond that is convertible (it can be exchanged for common stock at the discretion of the bondholder) and ranks below other loans (it is subordinate to other debt). In the event the issuer becomes bankrupt and liquidates its assets, as a subordinate debt the convertible subordinate note will be repaid after other debt securities have been paid. As with all debt securities, however, the note will be repaid before stock.

BREAKING DOWN 'Convertible Subordinate Note'

A convertible is a type of security that can be converted into common stock at the holder's option. Convertible securities can be exchanged for common stock at a stated conversion price. The number of common shares that can be obtained is determined by the conversion ratio, which divides the par value of the security by the conversion price. For example, assume the conversion price at the time of issue for a convertible subordinate note is $50. Each $1,000 note, then, could be exchanged for 20 shares of common stock ($1,000 / $50 = 20 shares).

The subordinate aspect of the note describes its ranking among other loans. As a subordinate debt, it is considered a junior debt, one that will not be paid until other, senior debt holders are paid in full. A convertible subordinate note, then, is a debt security that is both convertible to common stock at some point in the future and junior to other debts. Because the holder has the option to covert to stock, the note tends to offer a lower rate of return. In general, the more valuable the conversion feature, the lower the rate of return.

Conversion can be either voluntary or forced. A voluntary conversion is initiated by the holder and can occur at any time up to the expiration of the conversion feature. A forced conversion is initiated by the issuing company and can occur at any point in time. A company may, for example, exercise the call privilege on the convertible security. This may be done to remove long-term debt from its balance sheet without having to redeem bonds for cash. A company can encourage conversion by raising its dividend on common stock so that holders are better off owning the common stock.

RELATED TERMS
  1. Subordinated Debt

    A loan (or security) that ranks below other loans (or securities) ...
  2. Subordinate Financing

    Debt financing that is ranked behind that held by secured lenders ...
  3. Market Conversion Price

    An investor's effective cost to purchase common stock when it ...
  4. Convertible Security

    An investment that can be changed into another form. The most ...
  5. Conversion Value

    The financial worth of the securities obtained by exchanging ...
  6. Conversion Price

    The price per share at which a convertible security, such as ...
Related Articles
  1. Economics

    Understanding Subordinated Debt

    A loan or security that ranks below other loans or securities with regard to claims on assets or earnings.
  2. Professionals

    Shares from Conversion

    Series 7 - Equities Section 3: Shares from Conversion
  3. Options & Futures

    20 Investments: Convertible Security

    What Is It? A convertible, sometimes called a CV, is either a convertible bond or a preferred stock convertible. A convertible bond is a bond that can be converted into the company's common stock. ...
  4. Bonds & Fixed Income

    Convertible Bonds: Pros And Cons For Companies And Investors

    Find out why businesses choose this type of financing and what effect this has on investors.
  5. Bonds & Fixed Income

    Convertible Bonds: An Introduction

    Find out about the nuts and bolts, pros and cons of investing in bonds.
  6. Financial Advisors

    Worried About Stocks? Try on Convertibles

    Convertibles are a good hedge against equity market risk (if you're o.k. with losing a bit of upside potential).
  7. Professionals

    Convertible Bond Mathematics

    Convertible Bond Mathematics
  8. Professionals

    Corporate Securities: Preferred Stock

    Preferred stock is not issued by all companies. It is called "preferred" because its holders receive available dividend payments before common stockholders, and they also receive payments ...
  9. Bonds & Fixed Income

    Introduction To Convertible Preferred Shares

    These securities offer an answer for investors who want the profit potential of stocks but not the risk.
  10. Investing Basics

    What is Convertible Preferred Stock?

    Convertible preferred stock is preferred stock that can be converted into common stock as of a predetermined date at a specified ratio.
RELATED FAQS
  1. What is the difference between subordinated debt and senior debt?

    Understand the difference between subordinated debt and senior debt. Learn what a company is required to do in case of bankruptcy. Read Answer >>
  2. 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 >>
  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. 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 >>
  5. What are 'death spiral' convertible bonds?

    Conventional convertible bonds give the bondholder the right to exchange the bond for a certain amount of the issuer's common ... Read Answer >>
  6. Why would a corporation issue convertible bonds?

    Discover how corporations issue convertible bonds to take advantage of much lower interest rates as a result of a conversion ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center