Quora Answer: Are Convertible Bonds Safer Than Callable Bonds?

The following is my answer to a Quora question: “Are convertible bonds safer than callable bonds?”

A convertible bond, or note, is a type of fixed-income debt security.  It yields interest payments, but it can also be converted into a predetermined number of equity, ordinary shares.  This conversion may be effected at fixed times during the bond’s life.  It is, usually, at the discretion of the bondholder, not the issuer.

A callable bond is the opposite of a convertible bond.  A callable bond allows the issuer to redeem it before it reaches maturity.  This allows the issuing company to pay off their debt early, and take advantage of favourable interest rates to issue new debt.

None of this makes one safer than the other.  This is dependent on the rating of the debt, and the financial health of the issuer.  A convertible bond is a hybrid security that allows the bondholder to have an equity stake in the company.  It is a means for the investor who wants options.  The callable bond gives options to the issuer, instead.