Convertible Bond¶
A convertible bond is a corporate bond with an embedded call option on the issuer's stock, giving the holder the right to exchange the bond for a fixed number of common shares. Investors receive coupon payments and principal repayment like any bondholder, while retaining equity upside if the stock rises past the conversion price. Because the conversion right has value, convertibles carry lower coupons than straight debt from the same issuer.
HOW IT WORKS¶
Key terms are set at issuance. The conversion ratio defines the number of shares received per bond (typically per $1,000 face value). The conversion price equals face value divided by the conversion ratio. Parity (conversion value) equals the conversion ratio multiplied by the current stock price. The bond floor is the present value of the bond's cash flows discounted at the issuer's credit spread — the theoretical minimum price assuming the conversion option expires worthless.
The market price reflects whichever is greater — parity or the bond floor — plus a premium for the embedded option. When the stock trades well below the conversion price the bond behaves like credit; when the stock is well above it the bond tracks equity. Convertibles carry positive delta and gamma to the underlying stock and negative sensitivity to rising credit spreads and interest rates.
IN TAPEBOARD¶
Traders use Tapeboard to monitor convertible-related issuance and insider activity through the filings feed, which surfaces new convert offerings and material amendments as they hit. Because converts deep in the money signal future share count increases, Tapeboard's dilution tracking incorporates outstanding convertible securities alongside options and warrants when calculating fully diluted share counts. Distressed desks can filter the filings feed for busted converts — issues where the stock has fallen far below the conversion price — to screen for cheap credit opportunities. Convertible arbitrage desks can cross-reference delta-adjusted short positions in the underlying against the live filings feed to anticipate forced-conversion calls from issuers.