What does the term "convertible bond" refer to?

The term "convertible bond" refers to a type of bond that gives the holder the right to exchange it for a predetermined number of shares of the issuing company’s stock. This feature allows investors to benefit from potential increases in the company's stock price while still receiving fixed interest payments as a bondholder. If the company's stock performs well, investors can convert their bonds into equity, taking advantage of price appreciation. This dual nature of convertible bonds makes them particularly attractive to investors seeking both regular income and the potential for capital gains.

The other definitions provided do not accurately capture the essence of a convertible bond. For example, a bond that can be redeemed for cash at maturity does not include the conversion feature and is thus simply a standard bond. A bond that has a higher interest rate does not necessarily imply that it is convertible, as interest rates can vary for many reasons independent of the bond's structure. Lastly, a bond that cannot be traded describes a bond with restrictions on marketability but has no relation to the conversion aspect that defines a convertible bond.