CONVERTIBLE BOND
A bond issued by a company that may be exchanged by the holder for a number of that company’s shares at a predetermined ratio, or at a discount to the share price at maturity. Because the convertible embeds a call option on the company’s equity, convertibles carry much lower rates of interest than traditional debt and are therefore a cheap way for companies to raise debt. The problem for existing shareholders is that conversion dilutes the company’s outstanding shares. Typically, bonds are convertible into a company’s own stock. There are however ‘third party convertibles’, which convert into shares of another company.