Investing: Something For Everyone

by David Jenyns on November 28, 2008

A convertible bond or convertible debenture bond has two major investment appeals: limited risk of price decline and the possibility of important price appreciation. The value of a convertible bond or convertible debenture must ordinarily lie within a region specified by two limits. At the lower limit, is the straight debt value of the debenture, while at the upper limit lies the conversion value as determined by the current market price of the common. It is possible for the conversion value of the common to fall below the straight debt value, but in this case the value of the debentures would most probably settle near the straight debt value.

The “floor” is the estimated value of the bond without a conversion privilege. As interest rates rise, the investment value declines, and vice versa.

A Goodbody study said, “If a $1,000 bond is convertible into 20 shares of common stock and the common sells at 50, the conversion parity for the bond would be 100. Under these conditions, and assuming the bond is selling around 100, each point rise in the common stock would result in a two point rise in the bond.”

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