Convertible bonds

A convertible bond issued by a public company is one that starts as a bond but that can also be converted into ordinary shares in that company at any time before the bond matures, and at a previously specified price. In legal and accounting terms, until a convertible bond has been converted, it counts as a loan. Once converted, it is identical to other shares in issue and receives the same dividend. Convertibles usually provide a greater income than shares, but less income than a corporate bond. Holders of convertibles rank above ordinary shareholders in the pecking order in the event of a company going into liquidation. In general they can be seen as a compromise between the safety of bonds and the potential reward of equity. For the company that issues them – especially if it is a start-up – the fact that they tend to pay out a lower rate of interest than ordinary corporate bonds makes them a relatively cheap way to raise finance.

• See Tim Bennett’s video tutorial: What convertibles reveal about the stock market.

Merryn

Claim 12 issues of MoneyWeek (plus much more) for just £12!

Let MoneyWeek show you how to profit, whatever the outcome of the upcoming general election.

Start your no-obligation trial today and get up to speed on:

  • The latest shifts in the economy…
  • The ongoing Brexit negotiations…
  • The new tax rules…
  • Trump’s protectionist policies…

Plus lots more.

We’ll show you what it all means for your money.

Plus, the moment you begin your trial, we’ll rush you over THREE free investment reports:

‘How to escape the most hated tax in Britain’: Inheritance tax hits many unsuspecting families. Our report tells how to pass on up to £2m of your money to your family without the taxman getting a look in.

‘How to profit from a Trump presidency’: The election of Donald Trump was a watershed moment for the US economy. This report details the sectors our analysts think will boom from Trump’s premiership, and gives specific investments you can buy to profit.

‘Best shares to watch in 2017’: Includes the transcript from our roundtable panel of investment professionals – and 12 tips they’re currently tipping. The report also analyses key assets, including property, oil and the countries whose stock markets currently offer the most value.