Like some investors, you might be reluctant to put any more money into stocks at this time, but you believe that the long-term prospects for the market are good. However, CD and money market rates may not even keep up with inflation, and bonds don’t offer any growth potential. One alternative you might consider is convertible bonds (CVs).
CVs are usually issued by companies that are looking to raise money at a lower interest rate than they could with traditional bonds. And investors are compensated for the lower rates by having the option, but not the obligation, to convert the bond into stock at a later date.
When CVs are issued they become a debt of the corporation just like regular bonds. The difference is that you can exercise the option and exchange the CV for a predetermined number of the company’s shares. After the conversion, your capital will be treated just like any other share of stock.
The number of shares of stock you will get to convert your bond can vary from bond to bond. For instance, a 50:1 conversion ratio means that you would receive 50 shares of stock for every bond that you own. Or the CV may allow a conversion price per share. You would then have to divide the par value of the bond by the stated share price to determine how many shares you could get.
CVs usually follow the price of the underlying stock, and a conversion generally yields an equivalent dollar amount of stock. But if the stock’s price takes a nosedive, CV owners should receive at least the par value ($1000 per bond) of their holdings at maturity.
Therefore, you have a combination of an asset that has a fixed maturity date and maturity value, yet provides the potential for appreciation (note that bonds sold prior to maturity may result in profit or loss). This means that you receive the fixed income from holding a bond, and your investment has the possibility of growth similar to owning the company’s stock.
For more information on how CVs could possibly increase your portfolio’s income and growth potential, send an email or talk with a bond advisor.
Note: CDs are insured and offer a fixed rate of return while securities are not insured and the principal and yield will fluctuate with changes in market conditions.