Should you buy convertible bonds?

Convertible bonds offer you a fixed rate of interest with the option to convert to shares at a later date. But are they a good idea? And what can go wrong? Tim Bennett explains.

What is a convertible bond? Bonds and shares are best considered as separate investments. However, a convertible is a hybrid combining a bond with a call option (see below). You start off by owning an IOU, a bond that usually pays a fixed rate of interest.

Then, at a later date or a series of later dates you have the right (via the call option) to convert the bond into shares at a set price. This is done at a conversion ratio that specifies what every £100 of the bond's nominal value is worth in shares.

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Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.