Convertible Bond
A bond that can be exchanged for a fixed number of the issuer's shares at the holder's option.
Formula
Conversion Value = Conversion Ratio x Current Share Price; Conversion Premium = (Bond Price - Conversion Value) / Conversion Value
Unit
₹
In depth
A convertible is a bond plus an embedded call option on the issuer's equity, which is why it pays a lower coupon than a straight bond from the same issuer — the holder accepts less income in exchange for the conversion right. It offers downside protection from the bond floor and upside participation from the option, a combination that sounds ideal and is paid for through the coupon given up. Conversion dilutes existing shareholders when it occurs, which is why diluted earnings per share includes it. If the share price never rises enough, the holder simply receives a low-coupon bond.
Worked example
A ₹1,000 bond convertible into 8 shares is worth 8 x ₹110 = ₹880 on conversion at today's price. At a bond price of ₹1,010 the conversion premium is (1,010 - 880) / 880 = 14.8% — the share must rise that much before converting makes sense.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Convertible Bond” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.