What are convertible bonds?

• A. Equity securities that provide fixed dividends
• B. Debt securities that can be converted into a predetermined number of shares
• C. Short-term loans with high-interest rates
• D. Preferred stocks that do not pay interest

Answer: (B)

Convertible bonds are a type of debt security that gives bondholders the right to convert their bonds into a predetermined number of shares of the issuing company's stock. This unique feature allows investors to benefit from potential price appreciation in the company's equity while still receiving fixed interest payments on the bond until conversion. The conversion feature provides an incentive for investors, as they can participate in the upside of equity growth if the company's stock performs well, while the bond aspect offers a level of security and fixed return.

This characteristic distinguishes convertible bonds from other financial instruments, as they combine features of both debt and equity. The predetermined conversion rate is typically established at the time of issuance, providing a clear path for investors should they choose to convert their bonds to shares at a later date.