Convertible Bonds Key Terms

Learn the ins and outs of convertible bond terminology

By Mark Jenkins

People looking for a flexible way to invest in a company should consider convertible bonds. Like traditional corporate bonds, convertible bonds are a relatively low-risk kind of investment, yielding a small return at a fixed interest rate. Unlike corporate bonds, however, you can trade in convertible bonds for shares of the issuing company's stock. This gives investors the chance to capitalize on rising stock prices, although it does expose them to more risk.

Call date

The call date is the date on which you can redeem a convertible bond before it matures. This is also the earliest time the issuer can force the holder to convert the bond into stock.
Try: Raymond James & Associates explains the basics of convertible bonds and gives advice regarding call dates on its website.

Forced conversion

If a company's stock price rises above that of the convertible bond's redemption value, it may force the bond holders to convert their bonds into shares. This is one down-side to investing in convertible bonds.
Try: Investopedia ULC outlines the dangers of forced conversion in its introductory guide to convertible bonds.

Conversion ratio

The number of shares investors can receive for each convertible bond is the conversion ratio. Both the par price of the bond and the conversion price of the stock determine the ratio.
Try: For a brief look at how the conversion ratio affects convertible bonds, visit MySymp.com.

Conversion parity price

The amount an investor pays for stock after buying and then converting a convertible bond is the conversion parity price, also known as the market conversion price.
Try: Learn more about conversion parity price and how it affects convertible bonds at InvestorWords.com.

Yield

Yield is the interest earned by convertible bonds. It's just like the yield on regular bonds, except it may end before the bond's maturity date, if the issuing company calls the bonds.
Try: Get tips on valuing convertible bond yields from TheStreet.com.

Capital appreciation

Capital appreciation is an increase in a stock's value based on a rise in its market price. For convertible bonds, capital appreciation is not unlimited--a forced conversion can cap it, which makes the bonds less likely to yield huge gains than regular stocks.
Try: Visit The Motley Fool, which discusses the role of capital appreciation in the stock market after the financial crisis of 2008.