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. Bond

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

    A financial security that generally has a longer term than a ...
  5. Convertibles

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

    A security that ranks lower than other securities in regards ...
Related Articles
  1. 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.
  2. 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.
  3. Bonds & Fixed Income

    Convertible Bonds: An Introduction

    Find out about the nuts and bolts, pros and cons of investing in bonds.
  4. Professionals

    All of the following statements about convertible bonds are FALSE EXCEPT:

    A. If all of the bonds are converted, the stockholders will benefit.B. They depreciate when the stock rises in value.C. They typically carry lower interest rates than non-convertible bonds.D. ...
  5. Options & Futures

    The Mandatory Convertible: A "Must Have" For Your Portfolio?

    Mandatory convertibles are a little understood security with some distinct advantages. Find out if they are right for you.
  6. Investing

    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 voting rights. A convertible bond is a form of debt that features an embedded ...
  7. Options & Futures

    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 a convertible bond gives the bondholder the right to convert the asset ...
  8. Investing

    What is a convertible bond?

    A convertible bond is a bond issued by a corporation that, unlike a regular bond, gives the bondholder the option to trade in the bond for shares in the company that issued it. This gives the ...
  9. Bonds & Fixed Income

    How does face value differ from the price of a bond?

    Discover how bonds are traded as investment securities and understand the various terms used in bond trading, including par value, market price and yield.
  10. Bonds & Fixed Income

    Why is my bond worth less than face value?

    Find out how bonds can be issued or traded for less than their listed face values, and learn what causes bond prices to fluctuate in the secondary market.

You May Also Like

Hot Definitions
  1. Multiplier Effect

    The expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends ...
  2. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  3. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  4. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  5. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  6. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
Trading Center