Benefits of Convertibles

A PROPERLY SELECTED CONVERTIBLE BOND COMBINES THE APPRECIATION POTENTIAL OF STOCKS WITH THE HIGHER YIELD AND STABILITY OF BONDS

A convertible bond is a hybrid security.  It is first and foremost a bond.  Like other corporate bonds, it pays interest and has a fixed maturity date as well as a priority claim on the company’s assets.  As a result, a convertible will generally have the higher yield and stability typical of bonds.  A convertible bond also allows the investor to exchange the bond for a fixed number of shares of the issuer’s stock.  This conversion feature allows the convertible to participate in the appreciation of the underlying stock.  

The attributes of a convertible security are illustrated in the accompanying chart.  The “bond floor” represents the convertible’s value as a traditional (non-convertible) bond.  It will act as a floor during declining stock markets.  The diagonal line represents the “stock floor” or conversion value, which is the bond’s value if it is exchanged for stock.  The stock floor ensures participation in rising markets.  Bonds positioned near the center of the chart have the most attractive risk/return characteristics since they benefit from both the “bond floor” and the “stock floor”

A PROPERLY MANAGED CONVERTIBLE PORTFOLIO OFFERS DISTINCT ADVANTAGES OVER A STOCK PORTFOLIO:

Participate in 80% of a major stock market advance Avoid more than half of a significant stock market decline Generates a current yield several times that of a typical stock portfolio

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