Convertible Bonds

A convertible bond is a debt instrument that has the right to convert into a fixed number of shares. The result is a hybrid instrument that has characteristics of a bond i.e. it redeems at par and pays a running coupon (which is below the equivalent coupon that would be paid on straight debt). The right to convert into shares is valued as an embedded equity call option, struck at a premium to the spot price. The value of this option is reflected in the lower coupons over the life of the instrument