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Convertible Bonds

A convertible bond is one that looks like a bond, but it can also become an equity. These hybrid bond/equity products are both interesting and peculiar. They are interesting in that they provide you with income, albeit at a lower interest rate than a bond that was not convertible. They also provide you the right to convert the bond at any time to equity in the company at a rate that is disclosed through an indenture. (The indenture is part of the bond and spells out the terms of the conversion.) Here are some points to note if you're interested in convertible bonds:

  • As the price of the stock increases, the bond value increases even though interest rates may not have changed.

  • They will most likely have a “forced conversion” clause that allows the company to convert the debt to equity at its discretion.

  • You may want to consider a mutual fund that buys convertibles.


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