Zero-Coupon Convertible


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.

  1. Bond

    A debt investment in which an investor loans money to an entity ...
  2. Convertible Bond

    A bond that can be converted into a predetermined amount of the ...
  3. Coupon Bond

    A debt obligation with coupons attached that represent semiannual ...
  4. Convertibles

    Securities, usually bonds or preferred shares, that can be converted ...
  5. Zero-Coupon Bond

    A debt security that doesn't pay interest (a coupon) but is traded ...
  6. Municipal Convertible

    A zero-coupon municipal bond that can be converted into an interest-bearing ...
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