4. Convertibles Aa Aa E. 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. When warrants are exercised new shares are issued, or treasury stock the company has previously purchased is provided to the warrant holder. When convertibles are exercised: O Debt is replaced by common stock on the balance sheet. O New capital is provided to the issuer. Consider the case of Cheung Zap Inc. Cheung Zap Inc. just issued seven-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 $69.12. Cheung's convertible bonds pay a 8.64% annual coupon, but if Cheung had issued straight-debt bonds (no conversion), it would have had to pay 14.40% annual interest