What Are Convertible Bonds?

What are Convertible Bonds?  Convertible bonds are financial securities similar to typical bond investments however they can be use changed when they mature.  A convertible bond, or a convertible debenture for those whose maturity date exceeds 10 years time, is considered to be a hybrid security because it has more than one use.  A typical bond whether issued privately by a corporation or publicly by a government entity follows the usual methodology: bond face value, bond par value as the bond ages, coupon interest payments at regular intervals, and then maturity date payout of the bond face value amount.  Where convertible bonds break with typical bonds is what can be done with them once they reach maturity.  A hybrid security such as a convertible bond can be changed into cash or redeemed for stocks in the bond issuing company.  For this reason these special bonds have a particular advantage over typical bond investments.  At maturity time the investor is presented with more than just a single option to redeem their investment.

Convertible Bond Attributes

Convertible bonds are often referred to as special bonds because they possess particular advantages and traits over the norm.  This advantage however does come with a small price to pay: lower interest rates paid out to the bond holder.  Special bonds, even with a lower interest rate, should though be considered as part of any other investment portfolio.  In a way these convertible bonds have a built-in hedge against loss and provide more potential profit.  This is because with the cash out or stock shares in option at the bond maturity, one can optimize their investment at a future date.  For instance if the bond issuing company has increased in equity, the bond can be traded for the pre-determined amount of stock stipulated in the convertible bond contract.  If the company should lose equity during the lifetime of the bond, the bond holder can waive the stock option and simply receive the face value of the bond they are entitled to in cash.

Related posts:

1. What Are Bonds Investments?
2. What Is Bond Maturity?
3. What Is A Treasury Bond?
4. What Are Callable Bonds?
5. What Are Equity Bonds?