Convertible bonds

6 minute read · By Krishna Avadhani, Vestora Academy · Updated 18 October 2026

A convertible bond pays interest like a bond but can be converted into shares at a set conversion price. It combines a bond floor (value as a plain bond) with an embedded call option on the shares.

Companies issue convertibles to borrow at a lower interest rate. Investors get downside protection from the bond floor (if the issuer stays solvent) and upside if the shares rise. Convertible arbitrage funds buy convertibles and short the shares to isolate the cheap option.

Australian hybrid securities (often issued by banks) are different: many can be converted into shares or written off if the bank's capital falls too low. ASIC has warned retail investors that hybrids are complex and risky, and APRA announced in 2024 a plan to phase out bank hybrids from regulatory capital.

Key takeaways

Convertible = bond + call option on shares.
Bond floor gives downside support if the issuer is solvent.
Bank hybrids carry special loss-absorption risks.

Check your understanding

1. A convertible bond is economically similar to...

A bond plus a call option
A share plus a put
Cash
A future

Show the answer

A bond plus a call option. It can convert into shares if they rise.

2. Why are Australian bank hybrids riskier than they look?

They pay no income
They can convert or be written off in stress
They are unlisted
They never mature

Show the answer

They can convert or be written off in stress. Loss-absorption terms protect the bank, not the holder.

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General education only, not financial advice. Examples are illustrations. Rules, tax settings and products change; check official sources.