What is a convertible bond?

A convertible bond is a debt security that includes an option regarding how the principal is repaid. Investors are offered two options: either they are repaid the face value and interest in accordance with standard bond repayment procedures, or they may choose to be repaid in the form of shares in the issuing company. Depending on the terms and conditions of the convertible bonds, the option may be exercised at any time or at a specified time.