Convertible security
Convertible securities include instruments such as convertible debt and convertible preference shares. The conversion ratio, permitted dates, issuer or holder options and settlement terms determine the rights. Do not assume every convertible begins as debt or that the investor has guaranteed repayment and upside. Analyse the underlying claim, credit and market exposures and potential dilution. Convertible debt is an important subtype with financing cash flows. Evaluate an instrument’s actual claim and terms before applying a debt-only valuation model.
Worked example
A preference share can be exchanged for two ordinary shares under its terms. It is a convertible security, but it is not a bond merely because its value depends partly on the ordinary share price.
Common mistake
Using convertible securities and convertible debt as unrestricted synonyms or ignoring who controls conversion.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FM | Supporting | September 2026–June 2027 |