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Definition

Convertible bonds

Convertible bonds refer to the bonds that permit bondholders to convert them into common stock at their option.

Convertible bonds have features that are attractive both t bondholders and to the issuer. The conversion often gives bondholders an opportunity to benefit if the market price of the common stock increases substantially.

Until conversion, though, the bondholder receives interest on the bond. For the issuer of convertible bonds, the bonds sell at a higher price and pay a lower rate of interest than comparable debt securities without the conversion option.

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