Convertible Bond
Candlefocus EditorIn this way, a convertible bond is a hybrid security – it pays fixed-income payments like a traditional bond and also has a feature in the form of the conversion option, which is usually viewed as the primary benefit of holding convertible bonds. Such bonds offer investors a chance to benefit from stock price appreciation without having to purchase shares outright. Bondholders usually have the choice of converting their convertible bonds, or simply holding onto them for the duration of the investment period.
Investors typically consider convertible bonds when seeking both safety and the potential for increased returns. They are suitable for investors who are willing to take on a bit more risk to secure higher returns because their prices are highly sensitive to changes in the price of the underlying stock. In addition, convertible bonds may offer more certainty than stocks, as they are backed by a company’s financial health – provided the company does not default on the payments.
Because of their hybrid nature, convertible bonds often carry higher yields than the underlying stocks. This is because part of the bondholder’s return is the periodic coupon payments and the other part is the appreciation of the stock should it go up. convertibles also offer some protection against downside potential if the stock value should fall since coupon payments will still be made throughout the life of the bond.
Overall, because of their hybrid nature, convertibles offer investors a unique way to capitalize on stock market appreciation while also providing some assurance of income. As a result, convertible bonds can be viewed as a great way to diversify an investor’s portfolio while still providing potential upside and protection against downside fluctuations in the stock market.