What are convertible bonds?

Essentially, convertible bonds are corporate bonds that can be converted by the holder into the common stock of the issuing company. Below, we'll cover the basics of these chameleon-like securities as well as their upsides and downsides. Convertible bonds are corporate bonds that can be exchanged for common stock in the issuing company.

Why is a Vanilla convertible bond a good investment?

A vanilla convertible bond allows the investor to hold it until maturity or convert it to stock. The second reason is to delay dilution. Raising capital through issuing convertible bonds rather than equity allows the issuer to delay dilution to its equity holders.

Are convertible bonds dilution a risk?

Issuing companies with little or no earnings—like startups—create an additional risk for convertible bond investors. Share dilution happens if the bonds convert to stock shares, which may depress the share's price and EPS dynamics.

Can a convertible bond be a chameleon?

The answer is that they can be both, but not at the same time. Essentially, convertible bonds are corporate bonds that can be converted by the holder into the common stock of the issuing company. Below, we'll cover the basics of these chameleon-like securities as well as their upsides and downsides.