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Definition: Convertible Security
A convertible security is a form of financial security like a convertible bond or a preferred stock which can be converted into equity over a period of time. They usually have a very low pay out and their prices are largely dependent upon the price of the underlying common stock.
A convertible security like a bond can be bought which has an interest rate and this can be used in order to price the stock when it is converted to equity. Also in the case of a preferred stock, the price of the stock can be marked with respect to the amount of dividend that is received by the possession of a preferred stock.
The example a convertible security is the preference stock and convertible bonds that can be converted anytime to equity and common stock. In either of the cases, the pricing of the stock i.e. the equity after conversion can be made with respect to the dividend received from the preferred stock and through the returns received from the bonds.