Convertible Bonds
A convertible bond provides the holder the right to exchange the bond for stock of the issuer at specified future dates. Often convertible bonds contain embedded call options that provide the issuer with the right to buy back the bond at a specified price. Less frequently the bonds may include embedded put options that allow the holder to sell the bond back to the issuer at a predetermined price. The exchange ratio (the number of stock exchangeable per unit of bond) and the call (or put) price are often a function of time. The convertible may also have soft call features and the conversion value may be capped.
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