What is a convertible bond?

A convertible bond is a unique type of debt security that offers bondholders the option to convert their bonds into a specified number of shares of the issuing company's common stock, usually at a predetermined price and during certain periods. This feature allows investors to benefit from potential appreciation in the company's stock price while still receiving fixed interest payments as a bondholder.

The appeal of convertible bonds lies in their hybrid nature, combining aspects of both bonds and stocks. Investors who are conservative might prefer bonds for their steady income and lower risk, while those optimistic about a company's growth can take advantage of the conversion feature to participate in the stock's upside.

Other options do not capture this unique aspect of convertible bonds. Higher interest rates may be associated with many types of bonds, but they are not defining characteristics of a convertible bond. Similarly, a non-collateralized bond might refer to unsecured debt but does not imply exchangeability for shares. Lastly, the notion of a bond redeemable at maturity only restricts the broader flexibility offered by convertible bonds, which can be turned into equity before maturity if the holder chooses to do so.