Convertible Bonds
Categories: Bonds, Derivatives
A bond that can be converted into a set number of (usually) common stock shares.
Example: A $1,000 par bond is convertible into 20 shares of common stock. What is the base conversion price? $50 a share. That's 20 shares times 50 bucks to convert. But at exactly that number, the risk/reward may not be favorable, because equities can (and do) go down a lot all the time. Whereas the bond at a grand a unit is likely pretty steady and safe. So the actual conversion price, in practice, is probably a bit higher than the 50 bucks minimum.