What is a convertible bond?

A convertible bond is defined as a bond that can be exchanged for shares of common stock. This feature allows the bondholder to convert the bond into a predetermined number of shares of the issuing company’s stock at specific times during its life, typically at the discretion of the bondholder.

This conversion feature provides the investor with the potential for capital appreciation if the company's stock performs well, while still offering the security of fixed interest payments typical of bonds. Therefore, in scenarios where the company grows and its stock price increases significantly, the bondholder can convert their bond into stock, potentially yielding a higher return compared to just holding the bond to maturity.

The other options do not accurately describe the nature of a convertible bond. For instance, a bond that cannot be sold before maturity refers to a different type of bond without conversion features, while bonds with variable interest rates have their interest payments fluctuate with market conditions, unlike convertible bonds. Lastly, bonds backed by real estate are secured bonds, which are focused on asset backing and have no relation to stock conversion.