A convertible bond is a bond that converts into a preset number of shares of common stock.
Let’s say you bought a convertible bond for $100. At the time the common stock was selling for $20. Your convertible bond might come with an option to convert into four shares of common stock. You wouldn’t covert because 4 shares of common stock are only worth $80 (4 shares x $20). When you first buy a convertible bond the conversion feature is never a good deal. Let’s say the common stock raises to $35 a share. Now you might want to convert because 4 x $35 is $140 and you would have made a nice profit.
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