How to Analyze Convertible Bonds

by Alexis Lawrence
Investment in bonds should only be undertaken after a careful study of all the investment opportunities that may be available to your company.

Investment in bonds should only be undertaken after a careful study of all the investment opportunities that may be available to your company.

Convertible bonds are investment instruments that give the holder the ability to convert the bond into shares of the company’s common stock at a fixed ratio. Convertible bonds are unique because they share both fixed-income security characteristics, which are because they are bonds, and equity security characteristics, because they are convertible to stock. In essence, they are a bond-stock hybrid. What makes convertible bonds attractive to investors is that they offer a fixed-income stream like a bond but can easily be exchanged for shares of stock. Analyze the bonds by calculating the long-term yield potential.

Write down all the information for each convertible bond in which you are interested. This includes things such as the bond’s maturity date, the underlying stock price and coupon rate.

Go to an online bond calculator tool and input the information for each convertible bond. You can find bond calculators on sites such as Numa Web, Morningstar and E*TRADE’s Bond Center.

Review the results from the calculator tool for each convertible bond in which you are considering investing. The best investment is generally the one that offers the promise of the highest return.

Warning

  • It can be tough to predict the future of the market, and the predictions from the online bond calculator tool might not represent what the future actually holds.

References

  • Handbook Of Finance: Financial Markets And Instruments; Frank J. Fabozzi, CFA, Frank J Fabozzi, Ph.D., CFA, CPA
  • The Handbook Of Convertible Bonds: Pricing, Strategies And Risk Management; Wim Schoutens, Jan De Spiegeleer, Philippe Jabre
  • My SMP: Convertible Bonds

About the Author

Alexis Lawrence is a freelance writer, filmmaker and photographer with extensive experience in digital video, book publishing and graphic design. An avid traveler, Lawrence has visited at least 10 cities on each inhabitable continent. She has attended several universities and holds a Bachelor of Science in English.

Photo Credits

  • Scott Olson/Getty Images News/Getty Images