Convertibles are stealing the show with their safe investment image
in today's "protective" market. They seem to be overshadowing the
stocks and bonds, and this holds true for the mediocre issuers.
Debt Consolidation And Credit A convertible bond, as the name suggests, can be converted into
a company's common stock. The bonds are a source of additional
profit for the investors. Although investors are particular about
short-term performance of stocks, they're upbeat about a long-term,
fixed-income instrument that gives them profit on converting to
common stock, if the stock price soars within a range of 20 to 40
percent.
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Check Credit Rating Why the sudden craze for convertibles? The chief reason is the
strong desire of the investors for "safe" instruments to lock up
their precious life savings into. And the issuers have been smart
enough to grab this lucrative opportunity. A few years back, liquid
issuers-considered to be the stalwarts of the market-were ruling
the roost in the convertible bond market, with the average size of
a convertible issue touching $300 million to $350 million. But
today, nearly nine convertibles have a whopping size of $1 billion
and one has even crossed the $3 billion mark. The fall in stock
prices and the frequent quivers in the credit markets have created
a strong wave of demand for convertibles.
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Improve Credit Rating A convertible bond is issued at a strike price, 25 to 40 percent
higher than the market price of the general stock issued by the
company. The convertible bond has a 7-year maturity period and can
be called after three years. The issuer can call the bond, if the
market price exceeds the strike price. But if the strike price
manages to remain high till maturity, the investors have two
options: they can either get back the par value of the bond, or
convert it to common stock. However, in case of a mandatory
convertible, there is no choice-the bond has to be converted to
common stock.
Convertible bonds are legally debt securities, which are above all
equity securities in a default situation. Similar to other bonds,
their value is also influenced by the existing interest rates and
the credit worthiness of the issuers. However, convertibles have
opened two ways for the investors to earn dollars. One way is by
selling the convertible bond when its price soars in the market,
and the other way is by converting the bond to common stock and
selling the shares.
The best way for an individual investor to indulge in the
convertible bonds business is buying a mutual fund. This is because
convertibles are complex securities and, unlike common stocks, it's
not easy for beginners to get all the information about them.
Hence, the investors should check out certain things before buying
a convertible bond. These are: the interest rate and yield of the
bond, the number of years prior to maturity, the common stock price
during conversion of the bond, the features of the bond that make
it different from a usual bond, the negative aspects of the bond,
and the benefits while converting to a common stock.
Besides this, the investors should also inquire about the company
that is issuing convertibles. Any bond, either convertible or the
general one, is a loan. Hence, the investors should ensure that
their issuer has the capability to pay back what they owe.
Therefore, going for a convertible bond demands an extensive
homework on the part of the investor.
When we compare convertible bonds to convertible preferred stocks,
the former are safer. There are two reasons for this: the interest
on convertible bonds is paid before any stock dividends, and, if
the company suffers a loss, the investors of convertible bonds have
an upper hand over the investors of stocks while claiming the
money.
However, it's not prudent to get carried away by the benefits of
convertibles. Firstly, convertible funds happen to be costlier than
domestic stock funds, as the former come packed with sales charges.
Secondly, a majority of the convertibles are issued by companies
involved in technology and telecommunications, which are
characterized by unpredictable markets. And lastly, convertible
bonds don't guarantee a risk free investment just because they are
convertible.
Today there is also no market moving news expected from the US so greenback volatility will arise from factors that will affect the Feds descision on future monetary policy, namely the spreading credit concerns and the performance of the equity markets. The expectations of a rate cut from the Fed in September should provide stability to the equity markets and it will ease the credit crisis, therefore we should see the greenback maintain its bullish momentum in the near future.
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