A convertible bond, which is also referred to as convertible securities, issued by a company permits holders of a debt instrument to receive its common shares upon conversion at a later date. A callable bond is a debt instrument that permits the issuing company to redeem it before the maturity date. The redemption of a callable bond is made at a call price paid on the call date, which is higher than the face value of the bond.
The common feature of both convertible and callable bonds is that both give the option to exercise the right of conversion or redemption at a later date. The date is uncertain, and it is possible to generate a windfall profit. The early redemption of callable bonds requires the issue to compensate bondholders. On the other hand, convertible bondholders will convert a debt instrument only if there is a profit in conversion. The price of conversion or redemption is determined as the future value of the instrument.
Moreover, the value of convertible bonds or callable bonds is higher than straight bonds because of their feature to convert or call. The major difference between convertible bonds and callable bonds is the entitlement of conversion or redemption. In the case of convertible bonds, buyers of debt instruments have the option to convert them into securities. On the other, in the case of callable bonds, the issuing company has the option to redeem. Furthermore, it could be argued that it is possible to earn higher profits from convertible bonds than callable bonds. The stock price determines the profit of convertible bondholders. On the other hand, the premium of callable bonds is specified in the bond prospectus.