Advantages of Convertible Bond Investment

A convertible bond investment can offer many advantages. Convertible bond pricing is very competitive, and these bonds have a lot to offer. A convertible bond is a bond issued by a corporation or company which may be converted into shares of common stock at a later date. A convertible bond offers interest, called a yield, just like any other stock does. The yield offered by convertible bonds is normally just a little lower than the yield offered by most corporate bonds around the same time. These bonds allow you to collect interest on the bond until it is converted into stock, if it is.

A convertible bond is issued with an accompanying conversion ratio, which tells how many stock shares the bond will convert into for each thousand dollars invested in the bond. If the conversion ratio is twenty five to one, then each thousand dollars will convert to twenty five shares of stock in the company, at a cost of forty dollars per share. The conversion price for the stock shares is not set at market price when you make a convertible bond investment though, instead it is given at a cost that is a certain percentage over the current market price of the stock, usually between ten and thirty percent. This means a bond with a conversion price of forty dollars per share may be trading on the market right now for between twenty eight and thirty six dollars per share.

One advantage of convertible bonds is the interest collected until and unless the market price of the stock goes above the conversion ratio price per share. It would not make any financial sense to convert a convertible bond into stock shares if the conversion share price is forty dollars and you can get a market price of thirty dollars per share, because you would lose money. Convertible bonds also follow the market share price. If the stock price on the market goes up, the bond also rises. This difference is that the price of the bond only goes up about two thirds of the amount that the stock price does. The same is almost true of a price drop in the stock on the market. The price of the bond will also drop, but only by around half of the decrease in stock price.

Convertible bond investments are a great way for you to protect against market fluctuations, while providing annual gains at the same time. Convertible bonds will also let you invest in technology stocks while still receiving an income. A lot of technology stocks do not give dividends, but convertible bonds provide an income by paying a yield. Small and mid cap companies offer convertible bonds normally, and this sector has enormous growth potential. If the company takes off, you can convert your convertible bonds into stock shares that have a higher value than the bond does.

Convertible bonds offer many advantages over other bond types, and their potential return on investment may also be higher. These bonds follow the movement of the stocks, offering a better change of bigger returns. If stock prices do not raise to the conversion level, you will still receive the yield from these bonds, and the principal when the bond is turned in if it is not converted. A convertible bond has similarities to both a stock and a bond, and is a combination of the two securities in one product. Convertible bond pricing is a little more than the stock shares would be concerning price per share, but the advantages if you do convert could be enormous.