Convertible Subordinate Note

AAA

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.

RELATED TERMS
  1. Convertible Security

    An investment that can be changed into another form. The most ...
  2. Absolute Priority

    A rule that stipulates the order of payment - creditors before ...
  3. Convertibles

    Securities, usually bonds or preferred shares, that can be converted ...
  4. Junior Security

    A security that ranks lower than other securities in regards ...
  5. Bond

    A debt investment in which an investor loans money to an entity ...
  6. Note

    A financial security that generally has a longer term than a ...
Related Articles
  1. Bonds & Fixed Income

    Introduction To Convertible Preferred ...

  2. Bonds & Fixed Income

    Convertible Bonds: Pros And Cons For ...

  3. Bonds & Fixed Income

    Convertible Bonds: An Introduction

  4. Professionals

    All of the following statements about ...

Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Capitulation

    When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  5. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  6. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
Trading Center