Sunteți pe pagina 1din 2

Convertible Bonds

A Baird Wealth Management Solution

Convertible bonds are an attractive alternative for investors seek- of shares of common stock, the convertible bond
ing a combination of income and appreciation possibilities. investor has common stock exposure and will
Convertible bonds offer the safety of a fixed interest payment and participate, in varying degrees, with moves in the
stated maturity of a bond with potential for price appreciation underlying common stock.
based on the market performance of the underlying common
stock. The current yield received by bondholders is almost always Baird Can Help
higher than the dividend yield on the stock, while at the same As with any common stock purchase, consideration
time, there is the potential for price appreciation if the price of of a convertible bond investment involves careful
the underlying common stock increases. evaluation of the issuing company’s underlying
fundamentals. Baird has an extensive Fixed
What is a Convertible Bond? Income team that researches, sells and trades a
A convertible bond is a corporate bond with a fixed maturity full range of taxable securities for individual and
date, a semi-annual coupon payment and a conversion feature. institutional clients. The Portfolio Strategies and
The conversion feature allows the investor to exchange, at any Analytics Group utilizes state-of-the-art tools to
time, each convertible bond for a fixed number of shares of the help our clients enhance their investment
issuing company’s common stock. The conversion ratio will vary returns, while our fixed income market research
from bond to bond. provides investors with current information on
specialized products as well as reports on overall
Convertible bonds usually have a five- to 20-year maturity date market conditions. Baird is also active in the
and are issued subordinate to senior long-term debt. Major cor- secondary market for corporate securities.
porations as well as smaller start-up companies issue convertible
bonds, therefore the bond ratings will range from investment
grade to non-rated status.

Why Consider Convertible Bonds?


Convertible bonds provide the holder with an investment that
has the characteristics of a fixed income security and the return
potential of common stocks. They typically have a substantial
yield advantage over the underlying common stock and the
bondholders are entitled to interest payments prior to any payment
of common stock dividends.
Potential for appreciation.
A convertible bond’s yield may also offer a degree of downside
protection in the face of a falling stock price.1 Since the conversion
feature allows the holder to exchange bonds for a fixed number

1The price behavior of a convertible bond is affected by its underlying characteristics (conversion ratio, coupon, call protection, investment rating
and maturity date), the price behavior of the underlying common stock and the current and expected interest rate environment. The investor may
receive more or less than invested if sold before maturity or conversion. Price fluctuation can be more volatile than comparable corporate bonds.
Characteristics of Convertible Bonds Definitions Unique to Convertible Bonds
Since convertible bonds are “hybrid” securities, possessing Conversion Ratio: The number of shares that
characteristics of both common stocks and corporate bonds, would be received if the bond is converted.
there are a number of unique features that define them:
Conversion Premium: The amount by which
• The yield is generally higher than the dividends paid on the the market price of the convertible exceeds its
common stock and lower than the return on non-convertible conversion value. This can be expressed in dollars
bonds of similar quality and maturity. or as a percentage.

• Convertible bonds offer appreciation potential linked to the Conversion Price: The par value of the bond
growth of the underlying stock. The price of the bond should divided by the conversion ratio.
increase when the common stock price increases and, conversely, Conversion Value (Parity): The value of the
the price should fall when the common stock price falls. bond if it is converted into common stock at the
• Generally, a convertible bond has more price stability than current stock price.
the underlying common stock due to its debt characteristics. Investment Value: The bond’s worth as straight
A convertible bond has an estimated value without its con- debt without the conversion option. The bond’s
version provision. This value is subject to current market rating, the company’s financial condition, and
conditions, the bond’s coupon rate and its maturity. the relative level of interest rates are all factors in
Theoretically, the bond price should not fall below this value. determining this value.
• Most convertible bonds have some degree of call protection.
Investors are usually willing to pay more for bonds with better The Best of Both Worlds…
call protection because it gives them a longer window to By investing in convertible bonds you can
recoup the conversion premium. receive a higher yield than the stock dividend,
• Investors are paid interest on convertible bonds before dividends the appreciation potential of the underlying
are paid on preferred or common stock. Therefore, the bond- common stock, and downside protection
holder has a more dependable cash flow. because of the debt characteristics and the security
of fixed interest payments.
Why are Convertible Bonds issued?
Convertible bonds are usually issued by corporations when other The professionals at Baird can help you review
means of raising money would be more expensive. The conver- your investment portfolio and define your
sion feature is a “sweetener” to attract investors to accept a rate of investment objectives. Contact your Baird
interest on a bond that is below prevailing levels. They do so Financial Advisor or the Baird office nearest you
because if the price of the stock rises in value, the value of the to find out how convertible bonds might fit into
convertible bond will rise with it. your portfolio.

Robert W. Baird & Co. Incorporated. 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202.
Member NYSE. Member SIPC. 1-800-79-BAIRD. www.bairdonline.com ©2001 First Use: 8/2001 CC-13130

S-ar putea să vă placă și