A convertible bond is a kind of bond, which can be converted into the shares of the stock in an issuing company, generally at a certain pre-announced ratio. This is a hybrid security, featuring debt and equity like characteristics. Now, although it usually has a lower coupon rate, the holder gets compensated with the availability of converting the bonds to common stock, generally at a substantial rate of discount to the market value of the stocks.
If we take into account the perspective of the issuer, the major benefit of raising funds by way of selling the convertible bonds is in respect to a decreased payment of cash interest. However, in return for this benefit of decreased the payment of the interest; the value of the equity of the shareholder …