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3. Convertibles Aa Aa A convertible security (usually convertible bonds or convertible preferred stock) may be tendered at the option of the holder for shares of common stock in the issuing firm. In other words, the bonds or preferred stock may be converted to common stock. Like warrants, convertibles can lead to diluted earnings, because new shares of common stock are issued. However, unlike warrants, convertibles: Do not result in new capital for the firm Result in new capital for the firm Consider the case of Cheung Zap Inc.: Cheung Zap Inc. just issued five-year convertible bonds at a par value of $1,000. At any time before maturity, investors have the option to exchange their bonds for shares of Cheung's common stock at a conversion price of $49.92 Cheung's convertible bonds pay a 6.24% annual coupon, but if Cheung had issued straight-debt bonds (no conversion), it would have had to pay 10.40% annual interest