Convertible bonds have been a popular means for firms to raise funds in the capital markets. A convertible bond is an unsecured debt instrument that may be converted at the bond holder's option into the stock of the issuing company. The conversion feature is issued to the bondholders to persuade them to buy the debt. Convertible bonds are usually subordinate to the firm's other debt. Convertible bonds usually offer a lower interest rate than non-convertible debt.

Convertible bonds have features that are common to all bonds. They are long-term debt instruments. They are usually issued in one thousand dollar denominations, pay interest semi-annually, and have a fixed maturity date. However, if the bonds are converted into stock the maturity date is irrelevant because the bonds are retired when they are converted. Some also sinking fund requirements, which are a series of periodic payments to retire part of the debt issued.

Convertible bonds may also be called by the issuing firm. Once the bond is called, the owner must convert or any appreciation in price that has resulted in an increase in the stock's value will be lost.

Convertible bonds are attractive to some investors because they offer safety features of debt. If the bond holder converts into stocks, the bond holder will share in the growth of the company. If the stock prices rise, so does the convertible bond.

However, convertible bonds do have risks as well. If the company fails, the holder of the bond stands to lose the funds invested in the debt. Convertible bonds are also actively traded, so their prices do fluctuate. Their price is related to the value of the stock in which it may be converted. Periods of high interest rates and lower stock prices hurt the value of these convertible bonds.

The combination of the safety of debt and the potential for capital gains are what makes convertible bonds an attractive investment.