A Convertible Bond is

• A. a bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's common stock
• B. a bond that guarantees a fixed rate of return until maturity
• C. a bond that is backed by government guarantees
• D. a bond that pays dividends to shareholders

Answer: (A)

Convertible bonds are debt securities that include an embedded option allowing the holder to convert the bond into a predetermined number of shares of the issuer’s common stock. This option is at the owner's discretion and known by terms such as the conversion ratio or conversion price. The appeal is blending a fixed-income investment with potential upside in the issuer’s equity: if the stock price rises above the conversion value, converting can enhance total return; if not, the investor continues to receive interest and eventual principal repayment. The conversion feature generally means the coupon on a convertible bond is lower than on a comparable nonconvertible bond, reflecting the value of the option. The remaining statements describe other features not inherent to convertibles—a fixed-rate bond return, government backing, or dividends to shareholders—none of which capture the convertible bond’s defining element: the option to convert to stock.