The variability of return caused when one type of security is converted into another type of security. If a bond or a preferred stock is convertible into a stated number of shares of common stock of the corporation issuing the original security, the rate of return of the investment may vary because the value of the underlying common stock has increased or decreased. A convertible security normally has a lower coupon rate, or stated dividend (in the case of preferred stocks), because investors are willing to accept a lower contractual return from the company in order to be able to share in any rise in the price of the firm’s common stock.