Zero-Coupon Convertible

You didn’t think you’d see the exciting word “convertible” thrown between two nerd-words like “coupon” and “bond,” did you? Well, today’s your lucky day.

A zero-coupon convertible bond is a bond that features both a zero-coupon feature (which means it pays no interest) and a convertible feature (which means you could convert the bond into a common stock).

A zero-coupon bond may sounds ludicrous, but hear us out: it doesn’t give you interest, but you can buy it at a discount and get the face value once the bond matures. So yeah...that’s how money is made off of a zero-coupon bond. What a rebel compared to other bonds, right? It’s more or less wearing yellow Elton John glasses instead of the mainstream aviators, but it manages to somehow pull it off.

Meanwhile, convertible bonds are totally wearing aviators...the classic cool-kids. Convertible, in this case, means that the bond can be converted into a stock of the issuer. Which is cool for investors, because that means they can covert when the time is right, reaping gains when the issuer's stock goes up. Just like you can roll that convertible top down when the weather is nice.

Since zero-coupon convertible bonds are a cross between the safe-nerdness of the zero-coupon bonds and the cool-kidness of the convertible bonds, investors choose it to get the best of both worlds: lower risk with the option to convert if the price is right down the road.