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Convertible Security

Updated on March 17, 2023

A convertible security is an investment that can be changed or converted from its initial form into another investment. A convertible security can be a bond or preferred stocks which come with regular interest payment and can be later converted into shares of the issuing company. A convertible security comes with the specifics and qualifying terms/conditions/price at which it will be converted.

Types of Convertible securities

Types of Convertible securities
1. Convertible bond – this comes with an option to exchange the bond for a particular number of shares at a specified time.
Features of Convertible Bond:
1. A convertible bond has a maturity date and pays interest as well, like a regular bond.
2. If the bond is not converted to equity, investors receive the amount invested at maturity.
3. If it is converted into shares, the bond will no longer retain its debt features and will only have equity features.

2 Convertible Preference Shares
Preference shares come with a fixed dividend rate and generally do not have voting rights. Convertible preference shares have the option to convert them to common shares of the company.
Features of Convertible Preference Shares:
1. Convertible preference shares continue to pay fixed dividends before conversion.
2. Once they have been converted to common stock, they receive dividends declared by the company and also have voting rights.

Benefits of Convertible Securities

Benefits of Convertible Securities are:
1. Convertible Securities are considered lucrative by investors as these come with definite and defined benefits.
2. Depending upon the type, they offer double benefits: security of bonds as well as the growth through owning company stock.