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
- 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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