Is it a bond, or is it a stock? As an announcer in old-time television commercials might intone, a convertible bond can be both a bond and a stock Convertible bonds are souped-up versions of corporate bonds: A public company issues the securities, which pay interest at a fixed rate, although the rates are generally lower than what standard corporate bonds offer. But when the bonds mature, investors have the choice of either taking the cash or converting the bond into the company's common stock. Convertible bonds, in effect, offer a safer, alternative way to invest in a company's stock that spares you some volatility. When a stock's price rises, so does the price of the convertible bond. But if the stock price falls, the convertible bond's price drops less than the underlying stock. Cost considerations, including tax and transaction costs, can eat into the convertible bonds' return. But in a volatile market, investors may decide the extra insurance that convertible bonds provide may be worth any added costs. Investors looking to make a broader bet on convertible bonds may look into bond funds that have a big stake in converts.
Preaching About the Converts
Here are a few stories from
that can help put you in the driver's seat when it comes to convertible bonds.
Convertibles: Know When to Fold 'Em
Do-It-Yourself Convertible Arbitrage
Convertible Bonds and the Bull Market
Taking a Ride With Convertibles
How to Evaluate Convertible Bonds Like a Pro