A convertible bond confers a temporary right to exchange the bond for a predefined number of equity securities, e.g. shares. A holder who exercises the conversion right is no longer a creditor (i.e. provider of debt capital) but instead becomes a shareholder (i.e. provider of equity capital). If the conversion right is not exercised, the convertible bond behaves just like a normal bond. Due to the possibility to convert the bond into equity rights (which represents added value for investors), the interest rate on convertible bonds is mostly somewhat lower than on normal bonds.
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