When you say holder of the bond, do you mean the investor who lent the money, or the person who has the liability and must pay back the money? 

It was my understanding that the person with a liability (B/P) has the option to issue common stock instead of paying back the bond payable.  This is an advantage to the debtor, who pays the interest, because they have the option of not having to pay cash.  Therefore, the debtor has this extra option, so he should have to pay extra interest.  Ok, I'm back to where I'm started in still confused.

I think the sentence in bold is probably what I'm misunderstanding.  Can someone please explain why that's wrong? 

sanju06 makes sense and that is the way I understood after reading it millions times.

If a company sells a bond without a convertion feature the interest rate (stated rate) may be higher to attract buyers.  If a company who has better bonds because its bonds has convertible feature can  pay less (stated interest) becasue its bonds are better. Bigger demand for its bonds less interest they have to pay to attract customers.

Issuing stocks instead of paying interest on a bond? No sure about that.

The option of convertion belongs to the bondholder not to the issuer company. The issuer company had the autority to call stocks if stocks are callable/redemable. But I didn't know about bonds.

my 2 cents!

Ok so I was getting confused on the term bondholder (I know it's a basic term, but my brain is fried).  I was thinking the bondholder is the debtor who "holds" the bonds payable.  I'm thinking maybe you are referring to the bondholder being the investor.

If the bondholder is the investor, then they you are saying the investor has the right to convert.  This would mean they can tell the debtor "rather than giving me money, I want you to give me stock in your company."  So that's an advantage to them...and they can charge a lower interest rate because the debtor is giving them that advantage.  Wow that took a lot, but I think I am starting to get it.  Thanks.

Lesson learned:  Convertible bond is better for the investor, not for the debtor.  Therefore, investor will charge less interest for a convertible bond.  Hopefully that will stick until Sunday!