A convertible debt that can be converted into shares shares of common stock is known as a convertible corporate bond. The pricing or conversion ratio is based on a fixed convert price and the par value amount of bonds owned.
If an investor owns $1000 par value of a corporate bond that has a convertible price of 50 can own 20 shares of stock (1000 divided by 50). The pricing of these bonds tends to trade near par, since the price or interest rate risk with these bonds is less because of the conversion feature.
Normally when interest rates rise, bond prices go down. That is true with most bonds. Convertible securities offer investors a way out of the bond into stock of the company. That fact keeps the pricing market fairly stable on these bonds.
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Book Recommendation - Fixed Income Securities: Tools for Today's Markets, Second Edition, University Edition
Convertible bonds are bonds issued by corporations that are backed by the corporations' assets. In case of default, the bondholders have a legal claim on those assets. Convertible bonds are unique from other bonds or debt instruments because they give the holder of the bond the right, but not the obligation, to convert the bond into a predetermined number of shares of the issuing company. Therefore, the bonds combine the features of a bond with an "equity kicker" - if the stock price of the firm goes up the bondholder makes a lot of money (more than a traditional bondholder). If the stock price stays the same or declines, they receive interest payments and their principal payment, unlike the stock investor who lost money.
Why are convertible bonds worth considering? Convertible bonds have the potential for higher rates while providing investors with income on a regular basis. Consider the following:
1. Convertible bonds offer regular interest payments, like regular bonds.
2. Downturns in this investment category have not been as dramatic as in other investment categories.
3. If the bond's underlying stock does decline in value, the minimum value of your investment will be equal to the value of a high yield bond. In short, the downside risk is a lot less than investing in the common stock directly. However, investors who purchase after a significant price appreciation should realize that the bond is "trading-off-the-common" which means they are no longer valued like a bond but rather like a stock. Therefore, the price could fluctuate significantly. The value of the bond is derived from the value of the underlying stock, and thus a decline in the value of the stock will also cause the bond to decline in value until it hits a floor that is the value of a traditional bond without the conversion.
4. If the value of the underlying stock increases, bond investors can convert their bond holdings into stock and participate in the growth of the company.
During the past five years, convertible bonds have generated superior returns compared to more conservative bonds. Convertible bonds have generated higher returns because many companies have improved their financial performance and have their stocks appreciate in value.
Convertible bonds can play an important role in a well-diversified investment portfolio for both conservative and aggressive investors. Many mutual funds will invest a portion of their investments in convertible bonds, but no fund invests solely in convertible bonds. Investors who want to invest directly could consider a convertible bond from some of the largest companies in the world.
About the author: Tony Reed is the author of " Upside potential with convertible bonds", please visit his website Bonds trading & Bonds market for more information.
Bond Broker Job
Selling Bonds
If an investor owns $1000 par value of a corporate bond that has a convertible price of 50 can own 20 shares of stock (1000 divided by 50). The pricing of these bonds tends to trade near par, since the price or interest rate risk with these bonds is less because of the conversion feature.
Normally when interest rates rise, bond prices go down. That is true with most bonds. Convertible securities offer investors a way out of the bond into stock of the company. That fact keeps the pricing market fairly stable on these bonds.
================================================================================
Book Recommendation - Fixed Income Securities: Tools for Today's Markets, Second Edition, University Edition
Convertible bonds are bonds issued by corporations that are backed by the corporations' assets. In case of default, the bondholders have a legal claim on those assets. Convertible bonds are unique from other bonds or debt instruments because they give the holder of the bond the right, but not the obligation, to convert the bond into a predetermined number of shares of the issuing company. Therefore, the bonds combine the features of a bond with an "equity kicker" - if the stock price of the firm goes up the bondholder makes a lot of money (more than a traditional bondholder). If the stock price stays the same or declines, they receive interest payments and their principal payment, unlike the stock investor who lost money.
Why are convertible bonds worth considering? Convertible bonds have the potential for higher rates while providing investors with income on a regular basis. Consider the following:
1. Convertible bonds offer regular interest payments, like regular bonds.
2. Downturns in this investment category have not been as dramatic as in other investment categories.
3. If the bond's underlying stock does decline in value, the minimum value of your investment will be equal to the value of a high yield bond. In short, the downside risk is a lot less than investing in the common stock directly. However, investors who purchase after a significant price appreciation should realize that the bond is "trading-off-the-common" which means they are no longer valued like a bond but rather like a stock. Therefore, the price could fluctuate significantly. The value of the bond is derived from the value of the underlying stock, and thus a decline in the value of the stock will also cause the bond to decline in value until it hits a floor that is the value of a traditional bond without the conversion.
4. If the value of the underlying stock increases, bond investors can convert their bond holdings into stock and participate in the growth of the company.
During the past five years, convertible bonds have generated superior returns compared to more conservative bonds. Convertible bonds have generated higher returns because many companies have improved their financial performance and have their stocks appreciate in value.
Convertible bonds can play an important role in a well-diversified investment portfolio for both conservative and aggressive investors. Many mutual funds will invest a portion of their investments in convertible bonds, but no fund invests solely in convertible bonds. Investors who want to invest directly could consider a convertible bond from some of the largest companies in the world.
About the author: Tony Reed is the author of " Upside potential with convertible bonds", please visit his website Bonds trading & Bonds market for more information.
Bond Broker Job
Selling Bonds