Actually it sounds as if he would be buying convertible bonds according to the article. This means he will have the opportunity to convert his bonds into equity at some point in the future (at some share price in the future) if he chooses to exercise this right. Otherwise he will indeed just be collecting interest.

Yes, that is exactly the case! :)

So he is assuming Gilbert & company would be able to turn Yahoo around, churn out some cash and pay the interest? That would be very long shot given the history.