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.

Investopedia explains '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.


Filed Under:

comments powered by Disqus
Hot Definitions
  1. Yield Burning

    The illegal practice of underwriters marking up the prices on bonds for the purpose of reducing the yield on the bond. This practice, referred to as "burning the yield," is done after the bond is placed in escrow for an investor who is awaiting repayment.
  2. Marginal Analysis

    An examination of the additional benefits of an activity compared to the additional costs of that activity. Companies use marginal analysis as a decision-making tool to help them maximize their profits. Individuals unconsciously use marginal analysis to make a host of everyday decisions. Marginal analysis is also widely used in microeconomics when analyzing how a complex system is affected by marginal manipulation of its comprising variables.
  3. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
  4. Gilt-Edged Switching

    The selling and repurchasing of certain high-grade stocks or bonds to capture profits. Gilt-edged switching involves gilt-edged security, which can be high-grade stock or bond issued by a financially stable company such as the Blue Chip companies or by certain governments.
  5. Master Limited Partnership - MLP

    A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture.
  6. Class Action

    An action where an individual represents a group in a court claim. The judgment from the suit is for all the members of the group (class).
Trading Center