What are convertible bonds?

Convertible bonds are hybrid financial instruments that function primarily as debt securities but come with the unique feature that allows the bondholder to convert the bond into a predetermined number of shares of the issuing company's common stock. This conversion typically occurs at specific times during the bond's life and at an agreed-upon conversion price. The appeal of convertible bonds lies in their ability to provide investors with the potential for capital appreciation through equity participation, coupled with the fixed income characteristics associated with traditional bonds, such as interest payments.

The ability to convert into common stock is what distinguishes convertible bonds from other types of securities, making option B the correct choice. This conversion feature offers investors a way to benefit from both bond-like stability and equity-like growth, depending on the company’s performance and stock price movements.

The other options are not accurate representations of convertible bonds and do not reflect their fundamental characteristics. For instance, describing them as debt securities convertible into cash misrepresents their nature, as the bondholder has an option to convert into equity rather than cash. Similarly, characterizing them as equity securities or preferred shares misunderstands their position in the capital structure, as they are indeed debt instruments that provide a pathway to equity investment.