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Most people know about investing in the stock market, but not a lot people know about investing in convertible bonds. Just saying the phrase itself is a mouthful, but what does it mean and why should you invest in these securities? Convertible bonds, otherwise known as junior debentures, are corporate bonds that can be exchanged when initiated by the holder for a share of the company’s preferred or common stock during bond’s term of ownership.
Junior debentures combine the good attributes of both stocks and bonds, providing investors with an appealing investment choice. But how would you know if this type of bond is the right choice for you? Keep on reading so you can find out more about its pros and cons.
When you resort to convertibles, you can be very sure that you will earn money regardless of the trading status of the stock. The greatest feature of this bond is its high probability to increase its price when the stock rises. Investing in it is like enjoying the privileges of both realms where you have two options to make money.
Another advantage of this type of bond over other investment vehicles is the protection it provides when stock prices decline. Since it is sold at premium over a stock’s price, it is in turn expected to earn the premium back in a minimum period of 3-4 years after its actual purchase. The best thing about bonds like these is that it is a great way to earn from interest payments and higher bond prices on instances when stocks steadily rise.
But what’s the downside when investing in these bonds? First of all, convertible debentures are callable. The company that issued these bonds can redeem the bonds whenever they want to do so. This means that if you invested your money thinking that you would be reaping the reward in the years to come, you may be forced to reinvest it in less attractive options.
Another issue is that you cannot truly convert it to stock options whenever you want to do this. For this to happen, the price has to reach a certain number called the conversion premium. If you are really bent on owning stocks of this company, it might be a better option for you to buy it at a lower price instead of waiting for the conversion premium to be attained.
Remember that these bonds are typically issued by companies who are in the midst of a financial crisis. These bonds are offered by the owners of small enterprises who find it costly to issue shares of stocks or bonds. Owners who are trying to find a way to increase their resources would definitely issue either bonds or stocks. Meanwhile, bonds are offered when it is impossible to offer straight bonds or shares of stocks. If you trust the performance of a company and in their potential for growth, then you can buy the convertible debentures that it offers.
Just like any other kind of bond, you can expect both benefits and risks when you invest money in a convertible bond. However, there are people who consider these bonds as their greatest option. Before putting your money in this investment option, it is still best to analyze everything so your money will not be wasted.
The journalist who wrote this story has distinguished a corporate finance expert by the name of Josh Yudell. Josh Yudell is the CEO of a large and well-respected investor relations firm and has run market awareness campaigns for hundreds of public companies.