Convertible Bond

A convertible bond is a corporate bond that can be exchanged for a predetermined number of the issuing company's shares, at the bondholder's option, instead of being repaid in cash at maturity. It behaves like a regular bond most of the time but gains stock-like upside if the share price rises above the conversion price.

Companies issue convertibles because the conversion feature lets them offer a lower coupon than a plain bond would require, in exchange for giving investors a shot at equity upside, which makes it a cheaper form of financing for the issuer when the stock is expected to do well.