Demystifying Convertible Bonds
When one is interested in investments, two options usually come to mind: stocks or bonds. But did you know that there’s an alternative that mixes features of stocks and bonds? They are called convertible bonds and they refer to investments with fixed interest. Convertible bonds are a certain kind of bond which would allow you to invest in bonds as well as give you the option to convert those particular bonds to equity shares. These kinds of bonds can be considered as hybrid security bonds since they have features of equity and also debt.
While you do need to be cautious of some risks involved in convertible bond investments, the returns are generally high much higher than any stock would land you. In some ways, convertible bonds are even more financially lucrative than company stocks. This is because convertible bonds still pay the specified amount of interest. Stocks, on the other hand, tend to rise and fall in value, which affects the overall return of the investment.
The sad part with convertible bonds it that these are callable. This means that the company that issued the bonds can recall them at any time. What would happen in instances like this is that the initial principal from the investor will be returned. However, the investor will no longer profit from that investment; thus, he will have to resort to other investment options.
One limitation of convertible bonds is that it is callable. Any time the company wishes, they can redeem the bonds, and while you will get the initial principle back, you will no longer be receiving profit from this investment. You will have to look elsewhere to invest.
Also, in convertible bonds, you would still have to wait for a substantial rise in the stock value of that particular bond before you are allowed to convert it to equity. And since there is a directly proportional relationship between the prices of bonds and stocks, a decline in the stock price would also indicate a decline in the bond price. And as mentioned earlier, the prices of stocks are very unstable and unpredictable, unlike the prices of bonds.
Therefore, before you invest in a certain bond, do some research about that company first. Check if that investment has the capability to grow. You should ensure that the stock of the company is capable of rising so that it can provide you the profit you want even when the company is experiencing financial crisis. Knowing all of these would assure you that the investment you are planning is profitable.
But one great benefit of convertible bonds is that it allows you to invest in a company without really buying their stock. This way, you can get the benefits of regular interest payments without having to worry about the rise and fall of stock prices. In addition, you also have the option of converting the bonds to shares, which is equally rewarding if the company has growth potential.
Basically, convertible bonds come in two kinds: the convertible debenture and the convertible note. The difference is the span of time for the bonds to mature. For the convertible debenture, it usually takes about ten years to mature, while the convertible note would only require less.
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