when convertible securities are unlikely to be converted to stock they are referred to as hung convertibles this is most common when the cost of conversion is greater than the price of the underlying stock 
due to their limited prospects for conversion hung convertibles also known as busted convertibles trade more like debt instruments than quasi equity securities hung convertibles can also refer to two other instances where the likelihood of conversion is low hung convertibles tend to trade like other debt instruments due to the low probability of conversion when the price of the underlying security is high enough to justify conversion they tend to behave more like equities example of a hung convertiblehung convertibles can take the form of bonds which are backed by collateral or debentures which are dependent on the promise of the issuer to pay its obligations for example consider a convertible debenture with a face value of 1 000 that can be converted into 100 shares for a conversion price of 10 if the price of the underlying stock is 4 this debenture would be considered a hung convertible especially if it matures in a relatively short period such a debenture would therefore be priced as a debt instrument with its pricing determined by several factors including its coupon rate maturity current market interest rates and yields and the issuer s credit rating to solve the problem of a hung convertible a company therefore would need to improve its fundamentals such as revenue growth operating margins or return on invested capital to spur the common stock high enough to reach the conversion price convertible securities share many of the advantages of both bonds and stocks however they typically pay lower coupon rates than regular bonds benefits and limitations of hung convertiblessome investors view hung convertible securities as the best of both worlds they have the income producing and stable price qualities of a bond plus the conversion feature that can provide the potential to gain shares of common stock which have historically provided greater capital appreciation and been less sensitive to interest rates than bonds in other words an investor gets paid to wait by earning coupon payments up until maturity or conversion into common equity for an equity investor convertibles can offer a degree of participation in up markets and more downside protection in turbulent markets than owning the common stock outright hung convertibles come with drawbacks as well due to the conversion feature convertibles pay lower coupon rates than bonds of the same maturity and credit quality convertibles investment manager calamos investments pegs this difference at 300 to 400 basis points quite a spread in today s low interest rate environment and if the stock of the issuer performs poorly the investor will be left with a lower paying bond 1special considerationsvaluing convertibles is a complex exercise since factors that impact bonds such as interest rates and factors that impact stocks such as earnings growth must be analyzed in tandem when a convertible bond is trading close to its investment value or the value of an equivalent non convertible bond its price behavior will be more influenced by interest rates than one trading closer to its conversion value in general however a change in the fundamentals of the issuing company will have the greatest impact on a convertible s price 