When to Convert a Corporate Bond

A corporate bond is a hybrid security equipment that can be converted to the common stock of a company at any given moment. Its attractiveness lies in the fact that it can be converted when the stock price of the issuing company goes up. In general, convertible bonds produce higher yields if the price of stock rises.

A corporate bond on its own pays its owner a regular stream of monthly income. However, the coupon rate of corporate bonds is low due to the financial flexibility they entail owing to their convertibility. They therefore provide lower yields than other types of financial equipment. But the corporate bonds issued by companies typically pay higher rates than municipal or government bonds since the risk associated with them is greater.

The best corporate bonds are those that are purchased from a company with a healthy market standing. Information regarding a particular purchased corporate bond can be retrieved from the business or financial sections of major newspapers.

Familiarize with the Various Types of Corporate Bonds

Corporate bonds have a wide range of yields and ratings due to differences in the financial health of their issuing companies. Companies work under different sets of constraints and deal with a unique set of financial and other obligations. A new IT company, to take an example, is more likely to default than a well-established old blue chip company. The blue chip company’s bonds will, thus, be given a higher grading (such as AA) than the IT company's bonds will. Less stable companies will issue bonds that will fall in the junk bond category. Junk corporate bonds seem lucrative investment options on paper due to their higher promised yields. But the yields come at the price of the higher risk involved with them. The bondholder could be paid nothing if the corporation defaults, making the junk bond not worth the risk.

Conversion Terms

The terms of conversion are typically outlined at the time of bond issuance. Terms such as the prices, times and conditions under which conversion can proceed are highlighted. Bondholders should bear in mind that the issuing company can force corporate bonds to be converted to the common stock of the company if it is in a financial crunch.

Bankruptcy

If a company goes bankrupt, the corporate bondholder can lay a claim over its assets. The claim of a bondholder takes precedence over that of regular stockholders in the case of a liquidation. Some corporate bonds are secured, meaning that they are backed with certain assets that can be liquidated in times of bankruptcy. The liquidated amount can be used to pay off principal and interest on the bond.

Additional Factors to Keep in Mind

Corporate bonds should be converted after careful consideration of various factors at play, including the coupon, yield, duration, maturity, callability, rating and its convertibility.

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