A convertible loan, also called a convertible bond, is a bond that can be converted into common stock shares in the firm that issues the bond. When the bond is purchased/issued the agreement how many shares the bond can be converted to and the time restraint on the conversion, usually a bond has to be converted within a specified amount of time.
When a firm wants to raise money, they will sell bonds, investors buy these bonds and hold them for the specified time and at their maturity they sell them and collect the money. With a convertible bond, the investor is able to determine (within the terms of the bond contract) when they convert the bond. The number of shares that the bond yields is the conversion ratio.
An investor will convert the bond when the stock rises to a desirable level, if the stock falls or does not appreciate then the investor can hold the bond until it matures and receive the payout as they would with a regular bond.
- Verbruggen, A., W. Moomaw, J. Nyboer, 2011: Annex I: Glossary, Acronyms, Chemical Symbols and Prefixes.In IPCC Special Report on Renewable Energy Sources and Climate Change Mitigation [O.Edenhofer, R. Pichs-Madruga, Y. Sokona, K. Seyboth, P. Matschoss, S. Kadner, T. Zwickel, P. Eickemeier, G. Hansen, S. Schlömer, C. von Stechow (eds)], Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.
- J. Berk et al. Corporate Finance. Toronto: Pearson Canada Inc., 2012, pp. 862.
- P.Moles and N. Terry. "Convertible (Bonds)." [Online], Available: http://www.oxfordreference.com/view/10.1093/acref/9780198294818.001.0001/acref-9780198294818-e-1678?rskey=qyFsuF&result=4, 2005 [Aug 21, 2016].