Zero-Coupon Convertible

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DEFINITION of 'Zero-Coupon Convertible'

A fixed income instrument that is a combination of a zero-coupon bond and a convertible bond. Due to the zero-coupon feature, the bond pays no interest and is issued at a discount to par value, while the convertible feature means that the bond is convertible into common stock of the issuer at a certain conversion price.

BREAKING DOWN 'Zero-Coupon Convertible'

The zero-coupon and convertible features offset each other in terms of the yield required by investors. Zero-coupon bonds are often the most volatile fixed-income investments because they have no periodic interest payments to mitigate the risk of holding them; as a result, investors demand a slightly higher yield to hold them. On the other hand, convertibles pay a lower yield compared to other bonds of the same maturity and quality because investors are willing to pay a premium for the convertible feature.

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    The general relationship between current yield and risk is that they increase in correlation to one another. A higher current ... Read Full Answer >>
  4. What is a 'busted' convertible bond?

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    Municipal bonds are backed by dedicated taxes or revenue sources related to specific projects, or by the full faith and credit ... Read Full Answer >>
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