Convertible Bond
From Reuters Financial Glossary
A bond that is convertible into a fixed number of an issuing company's stock at a pre-set conversion price. This price is usually at a premium over the current or average price, but purchasers of the convertible bond hope that the price of the underlying stock will rise. Because of the prospect of possible capital gains on the shares, the bond can carry a lower coupon, or nominal rate of interest. Convertible bonds may often be used for arbritrage by traders who can make money by spotting differences between the valuation of the bond and the underlying shares.
