Zero-coupon convertible bond

A zero-coupon convertible bond, like other convertible bonds, can be converted into stock in the issuing corporation if the stock reaches the trigger price.

Municipalities may issue tax-exempt zero-coupon convertible bonds you can exchange before maturity for conventional taxable bonds.

The advantage of both taxable and tax-exempt zero-coupon convertibles is that they give you access to a potentially substantial gain for a small initial investment since you purchase the zero-coupon for less than the face value. But like all zero-coupons, these convertibles tend to be more volatile in the secondary market than nonconvertible bonds.