A convertible security is a security that can be converted into another security. Convertible securities may be convertible bonds or preferred stocks that pay regular interest and can be converted into shares of common stock (sometimes conditioned on the stock price appreciating to a predetermined level). Other convertible securities include asset-linked bonds, asset-linked notes, and bonds with asset warrants. Although a bond with an asset warrant is a type of convertible security, regular warrants are not. A regular warrant provides an equity option, where the holder may opt to buy newly issued shares at a determined exercise price and date. Equity capital notes are similar to warrants, except that there is no exercise price.
Types of convertible securities in the market are:
- Convertible bond
- Reverse convertible bond
- Convertible preferred stock
- Asset-linked bond
- Asset-linked note
- Bond with asset warrant
- Xiao, Tim (2013). “A simple and precise method for pricing convertible bond with credit risk”, Journal of Derivatives & Hedge Funds, 19 (4), 259-277.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.