Corporate bond that can be exchanged for ordinary shares in the issuing company within a designated period of time
Like other bonds, convertible bonds bear interest, and their face value is repaid in full upon maturity. However, the owner of a convertible bond also has option rights. During a specified period, the convertible bond can be exchanged for shares in the issuing company at a pre-determined price, which is usually higher than the price of the stock at the time the bond was issued. Because option rights are attached to it, a convertible bond bears interest at a lower rate than other comparable bonds.
The issue of a convertible bond must be approved at the Annual General Meeting by a three-fourths majority vote. The company usually undertakes a capital increase to ensure that there will be enough shares for conversion. Existing shareholders are given subscription rights to the new shares.
