Debt financing of any kind is fairly rare for Internet firms, which have generally used their sky-high stock-market values to finance capital projects and acquisitions.
Wall Street analysts speculate that Amazon will use the proceeds to build new highly automated distribution facilities and to fund international expansion.
The bookseller had been planning the offering on a road show for institutional investors over the next few days, but demand was so overwhelming, they will dispense with the usual marketing process, according to Morgan Stanley Dean Witter, which is handling the offering.
The offering is private placement, available only to institutional investors such as investment banks and insurance companies.
Market sources said $3 billion in orders came in for the planned $500 million issue within the first few hours. The company quickly boosted the issue to about $1.25 billion.
The attraction for investors is that the notes can be converted to shares in the future, meanwhile getting secure coupon income and a guarantee of their initial investment, provided they are willing to hold the bonds to maturity.
The coupon on the 10-year notes was set at 4.75 percent, and the notes can be converted at $156.05 a share, a conversion premium of 27 percent over Thursday's closing price.
"It's a nice way to play the Internet because you get a guaranteed return, plus the upside of the stock and a little less volatility,'' one market participant said. "It's great type of security for Internet stocks because they are so volatile.''
Steve Horen of NationsBanc Montgomery Securities said, "I think it is an extremely cost-effective way of raising capital for them.''
Since last May, Amazon shares rocketed ten-fold, from 15 to a peak of 185 in January, before settling back to the current level of 122.875, where they closed today, off 2.75.
Analysts noted that the convertible issue allows Amazon to tap institutional investors that have had a hard time buying the shares in the secondary market due to limited availability in the scale they are accustomed to buying.
But the debt issue raises some questions.
"The coupon is awfully low for a junk convertible,'' said David Simons, managing director of Digital Video Investments in New York. "Who would want this? Why don't they just go buy the stock?''
Amazon is unlikely to have positive cash flow until 2000 or 2001, leading Simons to wonder how it will pay the coupon on the bonds.
Amazon's sales almost quadrupled to $252.9 million in the fourth quarter of 1998 from $66 million for the same period the year before. The company lost $22.2 million in the fourth quarter, excluding a $24.2 million charge for costs related to mergers and acquisitions. A year earlier it lost $10.8 million.
Reuters contributed to this story.