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Convertible notes
Bonds that can turn into shares: conversion rate, conversion price, capped calls and diluted EPS, with Coinbase's 2030 notes.
The short answer
A convertible note is a bond the holder can swap for a set number of shares. Because of that option, the company pays a much lower interest rate than on a plain bond. The key terms are the conversion rate (shares per $1,000 of notes) and the conversion price ($1,000 divided by that rate). If the share price stays below the conversion price, the note is repaid in cash like any bond; if it rises well above, holders convert and the share count can grow.
The terms, with a real example
In March 2024, Coinbase issued $1.3 billion of 0.25% convertible senior notes due 2030 to institutional buyers. Its 10-K for 2025 gives the terms:
- Coupon: 0.25% a year.
- Conversion rate: 2.9981 shares of Class A common stock per $1,000 of notes.
- Conversion price: $1,000 ÷ 2.9981 = about $333.54 a share. Converting all $1.3 billion at that rate would mean roughly 3.9 million shares.
- When holders can convert early: one test is the share price staying above 130% of the conversion price (about $433.61) for at least 20 trading days out of 30 at the end of a quarter. Close to maturity, holders can convert regardless.
- Settlement: the company can pay converting holders in cash, shares or a mix, at its choice.
Capped calls
Companies that issue convertibles often buy a matching option, a capped call, from banks at the same time. It pays off if the shares rise above the conversion price, offsetting the dilution, up to a cap. Coinbase's capped calls for the 2030 notes start at the conversion price of about $333.54 and are capped at $503.46. Between those prices conversion adds little or no net dilution; above $503.46 it does.
How they show up in EPS
Diluted earnings per share counts the shares the notes could turn into, using the “if-converted” method: add back the interest on the notes to net income and add the potential shares to the denominator, unless doing so would raise EPS. That's one reason the gap between basic and diluted shares can be larger at companies with convertibles outstanding.
Where to find them in filings
- The debt note in the 10-K or 10-Q: principal, coupon, conversion rate and price, maturity and the conversion triggers.
- An 8-K at issuance: under Items 1.01 and 2.03, with the indenture attached as an exhibit.
- The EPS note: how many shares the notes add to the diluted count, or why they were left out.
- The equity statement: the cost of capped calls, which reduces additional paid-in capital.
Common questions
What is a convertible note?
A bond that the holder can exchange for a set number of the issuer's shares. It pays a lower interest rate than a plain bond because of that option.
How do you calculate the conversion price?
Divide $1,000 by the conversion rate. Coinbase's 2030 notes convert at 2.9981 shares per $1,000, a conversion price of about $333.54.
Do convertible notes dilute shareholders?
They can. If holders convert and the company settles in shares, the share count rises. Diluted EPS includes those potential shares when the effect lowers EPS.
What is a capped call?
An option a company buys when it issues convertibles, which offsets the dilution from conversion between the conversion price and a higher cap price.
Why do companies issue convertible notes?
They pay a much lower interest rate than regular bonds, in exchange for giving holders a share of any rise in the stock above the conversion price.
Disclosures
- Editor holdings
- The editor holds no position in any company named on this page. As of Nov 11, 2026.
- Compensation
- Nobody paid for this page. No affiliate links on this page.
- Sources
- Each company's own SEC filings, linked next to each number.
- Last updated
- Nov 9, 2026
General education, the same for every reader. Not a recommendation to buy, sell or hold any security, and it doesn't consider your situation.
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