What are convertible bonds in the context of ECM?

Convertible bonds are a unique financial instrument that blends features of both debt and equity. They are essentially bonds issued by corporations that grant the bondholder the option to convert the bonds into a specified number of shares of the company's stock. This conversion typically happens at a predetermined price, allowing investors to potentially benefit from the company's equity upside while also receiving fixed interest payments in the bond’s usual manner until conversion.

The dual nature of convertible bonds makes them attractive to investors, as they provide the stability of debt with the potential for equity appreciation. If a company performs well and its stock price rises above the conversion price, the bondholder can convert their bonds into shares and participate in the growth of the company. Moreover, if the company's performance is weaker, the bondholder is still protected to some extent by the bond's regular interest payments and principal repayment at maturity.

This distinct feature of having the ability to convert into equity is what clearly defines convertible bonds within the ECM landscape, differentiating them from other types of bonds or fixed-income instruments. This is why the choice emphasizing the conversion into shares is the correct understanding of convertible bonds in the context of equity capital markets.