Convertible bond

A corporate debt security that can or must be exchanged for a specified number of the issuer’s shares under stated conditions. It combines bondholder claims with potential or mandatory equity ownership.

Conversion ratio: The number of shares received for each convertible security upon conversion. It states how many issuer shares the bond delivers when converted.
Corporate bond: A debt security issued by a company to borrow money from investors. The convertible bond retains the issuer’s debt obligation until conversion or repayment.
Convertible arbitrage: An investment strategy that typically buys a convertible security and shorts its underlying shares. The strategy seeks to exploit pricing differences between the bond and its embedded equity exposure.
Straight bond: A debt security without an option to convert into the issuer’s shares. It has no equity-conversion feature, so its value depends on debt terms and credit.
Conversion price: The effective price per share at which a convertible security can be exchanged for equity. It links the bond’s principal value to the shares obtainable through conversion.
Common stock: A class of corporate ownership representing residual claims and usually voting rights. These shares are the equity delivered when conversion occurs.
Equity dilution: A reduction in existing shareholders’ ownership percentage when a company issues additional shares. Conversion creates new shares that can dilute existing ownership.
Warrant: A security granting the right to buy a company’s shares at a specified price before expiry. A warrant adds a separate share-purchase right rather than exchanging the bond itself.
Conversion premium: The percentage by which a convertible security’s price exceeds the value of its shares at current market prices. It measures the stock-price increase needed before conversion becomes economically attractive.
Bond maturity: The date on which a bond’s principal is due for repayment. Maturity defines when unconverted principal is ordinarily payable.

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