Upside potential with convertible bonds

					Convertible bonds are bonds issued by corporations that are backed by the
corporations' assets. In case of default, the bondholders have a legal
claim on those assets. Convertible bonds are unique from other bonds or
debt instruments because they give the holder of the bond the right, but
not the obligation, to convert the bond into a predetermined number of
shares of the issuing company. Therefore, the bonds combine the features
of a bond with an "equity kicker" - if the stock price of the
firm goes up the bondholder makes a lot of money (more than a traditional
bondholder). If the stock price stays the same or declines, they receive
interest payments and their principal payment, unlike the stock investor
who lost money. Why are convertible bonds worth considering? Convertible
bonds have the potential for higher rates while providing investors with
income on a regular basis. Consider the following:

1. Convertible bonds offer regular interest payments, like regular bonds.
2. Downturns in this investment category have not been as dramatic as in
other investment categories. 3. If the bond's underlying stock does
decline in value, the minimum value of your investment will be equal to
the value of a high yield bond. In short, the downside risk is a lot less
than investing in the common stock directly. However, investors who
purchase after a significant price appreciation should realize that the
bond is "trading-off-the-common" which means they are no longer
valued like a bond but rather like a stock. Therefore, the price could
fluctuate significantly. The value of the bond is derived from the value
of the underlying stock, and thus a decline in the value of the stock
will also cause the bond to decline in value until it hits a floor that
is the value of a traditional bond without the conversion. 4. If the
value of the underlying stock increases, bond investors can convert their
bond holdings into stock and participate in the growth of the company.
During the past five years, convertible bonds have generated superior
returns compared to more conservative bonds. Convertible bonds have
generated higher returns because many companies have improved their
financial performance and have their stocks appreciate in value.
Convertible bonds can play an important role in a well-diversified
investment portfolio for both conservative and aggressive investors. Many
mutual funds will invest a portion of their investments in convertible
bonds, but no fund invests solely in convertible bonds. Investors who
want to invest directly could consider a convertible bond from some of
the largest companies in the world.   About the author: Tony Reed is the
author of " Upside potential with convertible bonds", please
visit   his website Bonds trading & Bonds market for more
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