Convertible bonds are a type of corporate bond that gives the holder the option to convert the bond into a predetermined number of shares of the issuing company's stock. They combine features of both bonds and stocks.
The bondholder receives regular interest payments like a traditional bond but also has the potential upside of converting to equity if the stock price rises. For example, a convertible bond worth $1,000 might be convertible into 20 shares of stock.
Convertible bonds are attractive to investors who want the safety of fixed income with the growth potential of equity. They typically offer lower interest rates than regular bonds because of the conversion feature.