Definition of Convertible Debt

Convertible debt or convertible bond is a liability that can be converted into equity instead of repayment to bondholder in cash. Convertible debt is a hybrid instrument that has both equity and debt features. Traditional bonds mature on the end of the bond's term and are paid in cash to redeem. The convertible bonds give the holder a right to convert a bond into an equivalent value of shares and this way the debt is settled by offering a right to participate in the company’s net assets.

Assume a convertible bond that has a market value of $1020 can be converted into 10 shares that are being traded at $102.00.

Number of shares converted = $1020 / $102 = 10 shares