A convertible bond is a kind of bond, which can be converted into the shares of the stock in an issuing company, generally at a certain pre-announced ratio. This is a hybrid security, featuring debt and equity like characteristics. Now, although it usually has a lower coupon rate, the holder gets compensated with the availability of converting the bonds to common stock, generally at a substantial rate of discount to the market value of the stocks.

If we take into account the perspective of the issuer, the major benefit of raising funds by way of selling the convertible bonds is in respect to a decreased payment of cash interest. However, in return for this benefit of decreased the payment of the interest; the value of the equity of the shareholder gets decreased due to the dilution of the stock expected in case the bondholders change their bonds into shares.

As it is, the convertible bond markets of the United States, as well as Japan, have been of major global importance. As a matter of fact, these two markets are the biggest in regard to market capitalization. The other convertible bond markets are quite often illiquid, and the pricing is usually non-standardized.

Just like any usual bond, convertible bonds come with a maturity date, a maturity value, an issue size, an issue date, a face value and a coupon. They also come with a few additional features, like conversion price, conversion ratio, Parity value, conversion premium, call features, etc.

There have been several variations, in regard to the basic structure, as per convertible bonds. As it is, the following are a few variations in regard to convertible bonds:

1. Mandatory convertibles
Mandatory convertibles refer to short duration securities, usually with higher yields than that found over the underlying common shares, which are mandatorily convertible at the time of maturity in a predefined number of common shares. Mandatory convertibles are the ones, which only allow an investor to convert bonds into stock, in case the price of the share is a certain percentage over the conversion price.

2. Exchangeable
An Exchangeable bond is the one, which might be converted into shares different from those of the issuer. As it is, they are not convertible bonds; however, they share a few usual evaluation characteristics.

3. Vanilla convertible bonds
Vanilla convertible bonds refer to bonds that might be converted at an option of an owner into shares of the issuer, generally at a predetermined rate. These may or may not get redeemed by an issuer, much before the final maturity date, in regard to a few, share price performance conditions.

Convertible bonds play a very important role in the finance of a firm. As a matter of fact, convertible bonds bestow an investor with the benefits of both bonds as well as equities.

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