What type of securities can convertibles include?

Convertible securities are financial instruments that can be converted into a predetermined number of underlying equity securities, typically shares of common stock. The correct answer, which indicates that convertibles can include bonds and preferred stocks, accurately reflects the nature of convertible securities.

Convertible bonds, for example, are debt instruments that allow the holder to convert the bonds into a specified number of shares of common stock, usually at the discretion of the bondholder. This feature offers the potential for capital appreciation in addition to fixed interest payments typically associated with bonds. Similarly, convertible preferred stocks provide investors with the option to convert their preferred shares into common shares, thereby allowing them to participate in the upside potential of the company's equity.

This versatility is a significant attraction of convertible securities, as they provide a lower-risk hybrid investment that can appeal to a wide range of investors looking for both income and growth opportunities. By understanding this framework, investors can assess the benefits and trade-offs associated with these types of securities.