January 12, 2011
understanding swappable debentures
Even if many investors are actively engaged in stock trading, not all of them are familiar with convertible bonds. But what are these bonds and are they worth your time and money? Generally, convertible bonds, also termed junior debentures, refer to corporate bonds that can be transformed by the owner into equity shares of a company at some point in the debenture period.
This type of bond can be considered as a combination of the positive features of bonds and stocks, which make it a great option for investors. If you want to know whether convertible debentures are worth investing in or not, then you’ve come to the right place. This article will explain both the benefits and drawbacks of these bonds.
One selling point of the bond is the fact that it earns an interest for you no matter if the stock itself is trading sideways or downhill. The best part is that the price of the bond has the possibility of increasing along with the rising stock. When you think about it, it has the best of both worlds with the investor earning money either way.
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.
Keep in mind that most companies that issue these bonds are usually having problems financially. Normally, bonds are issued by smaller sized businesses who might find it expensive to issue stock shares or even bonds. Businesses looking for funds will certainly boost their cash through issuing bonds or issuing stocks. Businesses will certainly issue convertible debentures whenever stock shares or straight bonds aren’t a possibility. You should purchase a this bond if you have high hopes about the company’s future.
There are advantages and disadvantages to investing in bonds such as these. However, it could be the perfect choice for someone. Like any kind of investment, it is best to do your homework before deciding to put your hard-earned money in convertible bonds.
The essayist who wrote this exposition has found a well respected investment relations vet 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.
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