How do investors benefit from convertible bonds?
How do investors benefit from convertible bonds?
Convertible bonds typically carry lower interest rates payments than straight corporate bonds—the savings in interest expense can be significant. Investors accept the lower interest payments because the conversion option offers the opportunity to benefit from increases in the stock price.
What is a convertible bond and why do investors buy convertible securities?
A convertible bond offers investors a type of hybrid security, which has features of a bond such as interest payments while also providing the opportunity of owning the stock. This bond’s conversion ratio determines how many shares of stock you can get from converting one bond.
Why do some investors prefer to invest in convertible bonds instead of investing in bonds without convertible features?
Companies with a low credit rating and high growth potential often issue convertible bonds. For financing purposes, the bonds offer more flexibility than regular bonds. They may be more attractive to investors since convertible bonds provide growth potential through future capital appreciation of the stock price.
Who benefits from convertible bonds?
Regardless of how profitable the company is, convertible bondholders receive only a fixed, limited income until conversion. This is an advantage for the company because more of the operating income is available for common stockholders.
Which is more attractive to investors a convertible bond or a non convertible bond explain why?
Convertible bonds are an ideal compromise between the two, offering the higher returns commonly found with stocks along with the reduced risk associated with bonds. These lesser-known bonds offer greater choice and flexibility than nonconvertible bonds for investors who prefer greater control over their investments.
Do convertible bonds pay dividends?
Most convertible bonds issued after 2002 are dividend-protected. The protection is such that the value of the shares into which the bond is convertible is immune to all but a liquidating dividend payment.