rise in the stock price will drive up the convertible security's price by at least the same percentage. Thus, the market conversion price can be thought of as a "break-even point." If the price of the stock decreases to the point that the straight bond value is much greater than the conversion value, the convertible will trade much like a straight bond. This is referred to as a bond equivalent or busted convertible. Advantages to the investor Convertible bonds generally provide a higher current yield than common stock due to their fixed income features and superior claim to the assets of the company in the event of default. If the value of the underlying common stock rises, the value of the convertible should rise as well. The investor can benefit from the stock's upside movement by selling the bond without converting it to stock. Alternatively, the value of the common stock could fall, but in that case the convertible's price will decline only to the point where it provides an acceptable return as a bond equivalent. Disadvantages to the investor Most convertibles contain a call provision that allows the issuer to force conversion to the common stock. Such a provision limits the value associated with potential growth in the stock price. Convertibles typically have a lower yield than a nonconvertible, because the investor is receiving an additional right: that of conversion to the underlying stock. However, if the issuer's business does not grow and prosper, the investor has an opportunity cost associated with lost current yield compared to a nonconvertible, and a capital loss if the convertible security's price drops below the price the investor paid to purchase it. References Further reading Xiao, Tim (2013). "A simple and precise method for pricing convertible bond with credit risk", Journal of Derivatives & Hedge Funds, 19 (4), 259-277. See also Convertible currency Securities (finance) Embedded options