Convertible bond.

In plain English

A convertible bond pays interest like a regular corporate bond but gives the holder the option to convert it into a fixed number of the company's shares. That option lets you share in the stock's rise while collecting bond interest and, unless the company fails, getting your principal back if you do not convert. The tradeoff is a lower interest rate than a plain bond, the price you pay for the conversion feature. Companies issue them to borrow more cheaply. They behave like a bond when the stock is low and more like the stock when it is high.

01Why it matters

Convertible bonds mix bond safety with stock upside, but the lower yield is the real cost of that option, so understanding the tradeoff clarifies what you are actually buying.

02The math, step by step

A convertible bond pays 3 percent, versus 5 percent on the company's regular bonds. You accept the lower 3 percent for the right to convert into shares if the stock climbs, giving up about 2 percent of yearly income for that upside.

03What this is NOT

04Receipts

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