What are Convertible Bonds?
Convertible bonds are both bonds and stocks. These are the bonds that can be transformed into the common stocks. The holder of the bond has the ability to transform the bond into stocks or it can be traded for shares of the company issuing the bonds.
It is a type of a security for the investor. If a person invests in these bonds, it could provide two way benefits. The conversion of bonds into stocks allow individual to get interest incomes. The second benefit is increase in the price of stock anywhere in the future i.e. inflation.
It is a huge source of investment for the growing companies and investors. Moreover, many companies are going to continue benefitting from these convertibles in the coming year of 2020.
Since convertibles can be transformed into stock, therefore, the holder of the bond can take advantage from inflation of stock. For this reason, many companies provide decreased returns on convertible bonds.
Hence, when the stock does not yield expected return, the holder does not convert the bond into stocks and the bond becomes a liability on the owner. So it is known, convertible bonds does not always promise profits but it also involves risk.
The conversion ratio of bonds into stocks is also considered by the holder. This ratio demonstrates the number of shares that could be transformed from a bond.
Investing in Convertible Bonds
Convertible bonds investment could be a source of stable income, however sometime it can also involve risk. It is a desirable way of financing for many companies and investors. Investing in these bonds is a part of strategic planning.
However, investors are required to give thought to a number of factor before deciding to invest in convertible bonds. Investors have to contemplate the equity valuation as well as the interest rate levels i.e. what would be the interest rate. Interest rate fluctuations affect the value of a bond.
Also, the investor has to keep in mind the inflation and deflation of an economy.
Another factor of consideration is the volatility. Due to increase in market volatility, convertible bonds are becoming more popular among various companies. According to the current outlook on these bonds, it is sure that they are going to hold great significance in the coming year of 2020.
In the recent years, various tests have been devised to determine the qualities of these bonds and analyze the risk factors.
In the coming year, it is thought that there would be low interest rates across central banks. Government spending would increase i.e. fiscal policy. There are some geopolitical risk factors involved. The first geopolitical risk factor is the financial crisis between Italy and Europe.
The second geopolitical risk factor is the trade wars between the US and China. However the risk factors do not stop investors to invest in convertibles as the benefits provided by these bonds cannot be known. By looking at the positive sides, we are sure these bonds will gain more popularity among investors and in the world of money market.