What Is A Convertible Bond?

Patrick Curtis

Reviewed by

Patrick Curtis WSO Editorial Board

Expertise: Investment Banking | Private Equity

Convertible bonds are a security which is issued by a company as a means of raising money. They are essentially a combination of debt and equity. Convertibles are issued as bonds with an interest rate, principal and maturity, but the holder has the option of converting these bonds into an equivalent amount of equity in the company at a time of their choosing. If the owner chooses to convert these bonds, the debt issued on the convertible bonds is simply written off as the company is deemed to have paid them off with equity.

Convertible bonds will have a given conversion price, and this is the price at which they will be converted into equity. For example, if a bond has a par value of $1,000 and the conversion price is $20, then if the share price of the company rises above $20 the bonds will be converted to create (1000 / Share Price) new shares outstanding.

Convertible bonds must be taken into account along with possible shares created by options when calculating diluted shares outstanding for the purposes of Diluted Equity Value and Enterprise Value.

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Patrick Curtis

Patrick Curtis is a member of WSO Editorial Board which helps ensure the accuracy of content across top articles on Wall Street Oasis. He has experience in investment banking at Rothschild and private equity at Tailwind Capital along with an MBA from the Wharton School of Business. He is also the founder and current CEO of Wall Street Oasis. This content was originally created by member WallStreetOasis.com and has evolved with the help of our mentors.