Corporate bonds that are backed by the assets of the company are called convertible bonds. If the company doesn't pay back its debts, the bondholders have a legal right to these assets. Convertible bonds are different from other bonds or debt instruments because the bond holder has the right, but not the obligation, to turn the bond into a set number of shares of the company that issued the bond. So, the bonds are like bonds, but they also have a "equity kicker," which means that if the stock price of the company goes up, the bondholder makes a lot of money (more than a traditional bondholder). If the price of the stock stays the same or goes down, they get interest payments and their original investment back. This is different from the stock investor who lost money.
Why should you think about convertible bonds? There is a chance that the interest rates on convertible bonds will go up, and investors will get regular income from them. Think about these things: 1. Like regular bonds, convertible bonds pay interest every month.
- If the value of the stock that the bond is backed by goes up, bond investors can turn their bonds into stock and help the company grow.
- Downturns in this type of investment have not been as bad as they have been in other types.
- If the value of the stock that the bond is backed by goes down, your investment will be worth at least as much as a high yield bond. In short, the risk of losing money is much lower than if you just bought common stock. But investors who buy after the price has gone up a lot should know that the bond is "trading-off-the-common," which means it is no longer valued like a bond but like a stock. Because of this, the price could change a lot. The value of the bond is based on the value of the underlying stock. If the value of the stock goes down, the value of the bond will also go down until it reaches the value of a traditional bond that hasn't been converted.
In the last five years, convertible bonds have given better returns than bonds with less risk. The returns on convertible bonds have gone up because many companies have improved their financial performance and seen the value of their stocks rise.
Convertible bonds are an important part of a well-balanced investment portfolio for both cautious and risk-taking investors. Many mutual funds put some of their money into convertible bonds, but no fund puts all of its money into them. Investors who want to put their money to work right away could buy a convertible bond from one of the world's biggest companies.
