Convertible bond

A bond the holder can exchange for a set number of the issuer's shares. Worth at least the higher of its straight value and its conversion value, it offers equity upside with a bond's downside protection.

Where you will meet it

Convertible bond appears in 3 learning outcomes on the CFA syllabus. A few of them:

• Set out the key characteristics of a convertible bond
  CFA Level II · Fixed Income

  “A convertible bond gives the holder the right to exchange it for a fixed number of the issuer's shares, the conversion ratio, during a conversion period.”

• Discuss the ways hedge fund strategies can be grouped
  CFA Level II · Alternative Investments

  “Relative value strategies exploit pricing gaps between related securities, such as fixed-income arbitrage and convertible bond arbitrage.”

• Discuss relative value hedge fund strategies: their investment features, how they are put into practice and the role they play in a portfolio
  CFA Level II · Alternative Investments

  “Convertible bond arbitrage buys convertibles whose embedded options look cheap and shorts the issuer's shares in proportion to the option's delta, earning coupon income and trading gains around the hedge.”

See also

Conversion value · Straight value

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with C · Glossary