The spreading global recession has caused many investors to stay away from the markets. Many investor feel worry about volatile markets, in this situation , convertible bonds could be a viable instrument.
Convertible bons re a hybrid security with debt and equity-like feature. Like a normal bonds, convertible bonds pays coupon to their holder and there is option for holder to convert the debt into equity of the issuing corporation.
Why invest in convertible bonds
Investor can participate on appreciation of the company stock's price. If the share rise above the predetermined price, investor can convert the bond into share to take profits. If the shares drop below the conversion price, investor can wait until mature and pay out the par value. Meanwhile the investors continue to receive regular income from coupon payments. As such, convertible bonds can be considered a defensive way to invest in equities
Convertible bonds are less risky than stocks of the same companies because they ranked senior in company's capital structure. They have financial claims on the company's assets prior to stockholders if the company goes under. In addition, the interest is paid before any stock dividend. Convertible bond holders can at least get interest income even if the company's earning decline and can not afford to pay any dividend
on the other hand, they are regarded as riskier than conventional bonds since a decline in the share prices of the issuer can negatively affect their value. Their claims on assets during liquidation also come after conventional bond holders have gotten thier money back