What characterizes a convertible bond?

A convertible bond is defined by its unique feature that allows the bondholder to exchange it for a specified amount of another security, typically the issuing company's equity (common stock). This characteristic provides an added layer of value to convertible bonds, as they offer the potential for capital appreciation if the equity performs well while still providing bond-like fixed income features.

This ability to convert the bond into stock allows investors to benefit from the upside potential of the company’s growth, while also having downside protection through the fixed income aspect of the bond. Investors often favor convertible bonds for their hybrid nature, which combines characteristics of both debt and equity.

The other characteristics described in the options do not accurately reflect the nature of convertible bonds. For example, the claim that they are only issued in the primary market is too restrictive and does not address the broader nature of convertible bonds. Additionally, stating they pay variable interest rates does not capture the essence of a convertible bond, as these typically pay fixed interest rates. Lastly, the assertion that they cannot be traded in the secondary market is misleading, as convertible bonds are generally traded freely in the secondary market just like many other types of bonds.