Convertible bonds are securities that are bought under the mutual funds category. The convertible bit of these securities is that, they can be turned into a pre-determined amount of money that is equivalent to the equity of the company that holds the bonds. Usually, the conversion is done upon the investors request and the proceeds go to him. They are commonly known as CVs and by issuing them a company ensures that an investor does not negatively interpret the intentions of the company.

A convertible bond normally issues a lower return on the principle amount, probably because there is a lot of tendency for investors to liquidate their bonds way before they have matured. Sometimes they are converted into other common stocks of the issuing company. It is after conversion into these stocks that the bonds are able to sell at a higher interest rate, because at the time of conversion, the conversion rate is always very low.

During the conversion process, there is a conversion ratio that is applied. It is also known as the premium. This helps to determine how many shares or stocks can be derived from each bond. This is then expressed as a ratio, and is specified in the indenture, such that there is a constant mode of conversion that does not favor or disfavor. The ratio is in most cases determined by the issuing company.

Convertible bonds are affected by a number of related terms and concepts which are important for investors to be aware of. One of the terms is minus yield, which refers to a situation in which the bond is sold at a higher premium less the interest the bonds itself would have accrued. Premium over bond value is the positive difference the market price of bond and the value it would sell for if it were to be converted. This helps one to determine whether to convert or not.