Convertible Bonds
by Cara Scatizzi
Investors typically classify investments into either the fixed income or equity category. But not all securities fit into only one niche.
Convertible bonds have both bond-like and stock-like features.
In this article
- How It Works
- Types
- How to Trade
- Investor Suitability
- Tax Consequences
- The Pros
- The Cons
- Additional Information
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A convertible bond is a bond that provides a stated coupon, but that also gives the holder the right to convert the bond to a specified number of shares of the issuing company’s common stock. Depending on market conditions, an investor’s return may be more bond-like, based on the stated interest rate, or it may be more equity-like, due to its conversion features.
These hybrids have three basic attributes:
- An upside potential that normally is less than that of the underlying common stock because convertible buyers pay a premium for the conversion privilege.
- Less downside risk than the stock due to built-in price supports.
- A yield that normally is higher than that of the associated stock.
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