Fixed Income Securities (Bonds): Convertible Bonds

A convertible bond is a corporate bond that can be converted by the holder into the common stock of the issuing company. Convertible bonds offer the buyer an opportunity to exchange the bond for a pre-determined number of shares of the company. Because convertibles can be changed into stock and, thus, benefit from a rise in the price of the underlying stock, companies offer lower yields on convertibles. If the stock performs poorly, there is no conversion and an investor receives the bond's sub-par return—below the return of a typical non-convertible corporate bond.