Convertible Bond / Preferred
A bond or preferred stock exchangeable into a set number of common shares.
What is Convertible Bond / Preferred?
Conversion ratio = par value / conversion price. Parity is when the convertible and the shares it converts into are worth the same. Convertibles pay a lower coupon than comparable straight bonds in exchange for equity upside, and their prices follow the stock when the stock is well above the conversion price.
Convertible Bond / Preferred: a worked example
$1,000 par convertible at $40 = 25 shares. With the bond at $1,100, the stock's parity price is $1,100 / 25 = $44.
More terms in Bonds & Cash Equivalents
Certificate of Deposit (CD)
A bank time deposit paying a fixed rate for a fixed term, FDIC insured.
Commercial Paper
Unsecured short-term corporate debt, 270 days or less.
Treasury Inflation-Protected Securities (TIPS)
Treasuries whose principal adjusts with the CPI.
Zero-Coupon Bond
Sold at a deep discount, pays no interest, matures at par.
Asset-Backed Securities (ABS / MBS)
Bonds backed by pools of loans - mortgages, auto loans, credit cards.
General Obligation (GO) Bond
A municipal bond backed by the issuer's full faith, credit, and taxing power.
Revenue Bond
A municipal bond repaid only from the revenue of a specific project.
Insured Municipal Bond
A muni with third-party insurance guaranteeing principal and interest.