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The bond has a maturity of 10 years and a convertible ratio of 100 shares for every convertible bond. If the bond is held until maturity, the investor will be paid $1,000 in principal plus $40 in interest for that year. However, the company's shares suddenly spike and are trading at $11 per share.
A reversible convertible bond allows the company to convert it to shares or keep it as a fixed income investment until maturity.
Convertible notes are loans and, like most loans, have a fixed maturity date at which point they are to be repaid with interest. These maturity dates vary, but typically are 18-24 months after the closing date.
If the convertible note has not converted prior to the end of its term due a financing or sale of the company, the best option is usually to extend the term of the note for an additional year.
But unlike stock, convertible bonds can only fall so farprovided the issuing company remains solventsince they have a specific maturity date when investors will receive their principal. In this sense, convertible bonds have a more limited downside than common stocks.