What defines a convertible bond?

• A. A bond that pays dividends
• B. A bond convertible to stocks or equity shares
• C. A bond with a variable interest rate
• D. A bond secured by real estate

Answer: (B)

A convertible bond is defined as a bond that can be converted into a predetermined number of the issuer's equity shares, typically common stock, at certain times during its life, usually at the discretion of the bondholder. This characteristic allows investors the opportunity to benefit from potential appreciation in the company's stock value while receiving fixed interest payments until conversion.

The ability to convert into equity provides an advantage, especially in a growing company, as it allows bondholders to participate in the upside potential of the company's performance without initially taking on the full risk associated with equity investment. This unique feature sets convertible bonds apart from other types of bonds, making option B the correct answer.

While dividends are associated with stocks, variable interest rates describe floating-rate bonds, and real estate securing a bond relates to mortgage bonds, none of these define the core characteristic of a convertible bond.