What financial instrument can be converted into stock at a predetermined price?

The correct choice is a convertible bond because this financial instrument provides the holder with the option to convert it into a specified number of shares of the issuing company's stock at a predetermined price, known as the conversion price. Convertible bonds are appealing to investors since they combine features of debt and equity; they typically offer regular interest payments like a traditional bond while also granting the potential for capital appreciation through conversion into equity if the company's stock performs well.

When bondholders convert their bonds into stock, they essentially gain the benefits of equity ownership, such as voting rights and dividends, depending on the nature of the stock they receive. This characteristic makes convertible bonds a unique option for investors who seek both income and potential growth.

While common stock and preferred stock are equity instruments and debentures are a type of unsecured debt instrument, none of these provide the specific conversion feature that is a hallmark of convertible bonds. Understanding the mechanics of convertible bonds is crucial for investors considering their role in a diversified investment portfolio.