Convertible bonds are bonds issued by corporations that are backed by the assets of the corporations. In the event 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 bondholder the right, but not the obligation, to convert the bond into a predetermined number of shares in the issuing company. Thus, bonds combine the characteristics of a bond with a “stock kicker”: if the price of the company’s stock goes up, the bondholder makes a lot of money (more than a traditional bondholder). If the stock price remains the same or low, 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 income to investors on a regular basis. Consider the following:

1. Convertible bonds offer regular interest payments, just like regular bonds.

2. The falls in this investment category have not been as dramatic as in other investment categories.

3. If the value of the underlying shares of the bond decreases, the minimum value of your investment will be equal to the value of a high yield bond. In short, the downside risk is much less than investing directly in common stocks. However, investors who buy after a significant price appreciation should realize that the bond is “negotiable”, which means that it is no longer valued as a bond but as a stock. Therefore, the price could fluctuate significantly. The value of the bond is derived from the value of the underlying shares and therefore a decrease in the value of the shares will also cause the value of the bond to decrease until it reaches a floor which is the value of a traditional bond without conversion. . .

4. If the value of the underlying stocks increases, bond investors can convert their bond holdings into stocks and participate in the growth of the company.

Over 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 their shares have appreciated.

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.