What are convertible bonds and what is special about them? We explain everything that is important.
- Here’s how convertible bonds work
- Investment for arithmetic artists
- Benefits from two investment worlds
- Alternative convertible bond funds
- Markets for convertible bonds and mutual funds
- Convertible bond: investment with option to act
- FAQ: Frequently asked questions and answers
Here’s how convertible bonds work
When investors invest in a convertible bond, the conditions are set out in advance:
- nominal value the link
- Duration
- Zinskupon
- Conversion Price: May be higher than the share price at the beginning of the term
- number of Actionsthat investors receive during the conversion
- First possible moment for conversion: this can be before the end of the mandate
Depending on the price trend of the link and shares have buyers different action options with different odds of winning.
Investment for arithmetic artists
Convertible bonds are more complicated to trade than equities or non-convertible bonds. Investors need to calculate in advance which variants of a share’s price trend which strategy makes sense. The following simplified calculation examples can serve as a guide.
The starting point: Investor A buys a convertible bond from Z-AG, which is therefore the issuer, with a nominal value of EUR 1,000 and a maturity of 3 years. The interest rate is 4 percent per annum. At the beginning of the term, the price of the Z share is EUR 50. The conversion price is EUR 55. A conversion is possible after 1 year at the earliest and thereafter at any time during the term of office.
- Variant 1 – better not to convert: At the end of the mandate, the price of the Z-AG share is 53 euros. A receives the coupon of 120 euros – interest of 40 euros for three years. Upon maturity, A could exchange the convertible bond for equity. However, this is disadvantageous because it would have to pay 55 euros per share, compared to just 53 euros on the stock exchange.
- Variant 2 – it is better not to convert: At maturity, the share price is 48 euros. A could buy the Z-AG share on the market at 48 euros, if converted it would have to pay 55 euros. Again, the exchange would not be profitable. A redeems the face value of the convertible bond. In total, he receives € 1,000 plus € 120 of interest.
- Variant 3 – profitable exchange: At the end of the term, the price of the Z stock is 60 euros. He will now exercise his conversion option because he will only have to pay € 55 per share and will receive 18.18 shares for his € 1,000 investment. He can sell these shares on the stock exchange for 60 euros each, for a total of over 1,090 euros. He also receives the coupon for a total of 120 euros.
Brief explanation: Assessment helps in risk assessment
By buying bonds, investors grant the company a loan, also called a bond. If the company, which in this case is the issuer of the bond, is doing badly, the bond’s value drops – at worst to 0 if the company becomes insolvent and cannot repay the loan. And there aren’t any with bonds or convertible bonds deposit insurance. Bond ratings help you better evaluate and evaluate potential bond investments.
Benefits from two investment worlds
Convertible bonds combine the benefits of equity and bond ownership: Investors benefit from rising share prices and are protected from sharp price falls. Experts call it asymmetric risk profile. Experience has shown that convertible bonds participate in about two thirds of the share price increase, but only one third of the price loss.
* Detailed information on the services, in particular on the exclusions, can be found in the respective product conditions of the card.
Alternative convertible bond funds
One disadvantage of convertible bonds is that they are usually offered in large packages. Investors often have to invest amounts of at least five digits. Therefore, convertible bonds are more suitable for institutional investors such as insurance companies and pension funds. However, retail investors can invest in convertible bond funds. These should be priced in hard currencies.
Statistics: Most Popular Stocks Than Bonds
The Global Consumer Survey has established how German private investors would prefer to invest € 100,000:
- Stocks and mutual funds are ahead.
- This is followed by a savings book and real estate.
- Then we talk about raw materials such as precious stones and gold.
- In 5th place, investors would invest in bonds or other fixed income securities.
- they are even less popular Cryptocurrencies and pension insurance.
More than a third of respondents would not invest the full amount.
Markets for convertible bonds and mutual funds
In the stock Exchange Frankfurt has a list of convertible bonds. Investors can also search for convertible bonds and convertible bond funds on some investment platforms. Research on online banks and house bank advice also help.
Convertible bond: investment with option to act
Investing in convertible bonds is less risky than investing in pure stocks and offers greater opportunities for profit than traditional bond investments. Convertible bonds are a good addition to the portfolio. But as a rule, at least five digits of investment are usually required for the acquisition. To take full advantage of this, investors should be able to calculate the consequences of various stock market developments on their investment. With convertible bond funds, the risk can be widely spread.
FAQ: Frequently asked questions and answers
Are convertible bonds also suitable for private investors?
An investment in convertible bonds usually requires at least a five-digit investment sum and the ability to calculate the influence of various stock market developments on the investment. Therefore, they are less suitable for newcomers to the stock market.
Are convertible bonds dangerous investments?
They have a lower risk of loss than stocks and promise a fixed interest rate at the end of the term, but at worst they can become worthless if the issuer goes bankrupt.
How can investors assess the risk of a specific convertible bond?
Rating agencies help with the rating. They regularly assess the financial strength of companies and the value of their shares and bonds.
Please note that our articles are purely editorial content that provides an overview of a specific topic. American Express does not provide investment advice or make recommendations. The topics we cover, such as credit and loans, stocks and bonds, insurance and others, are always risky, which is why you should always speak to experts if you are planning further steps in this direction. American Express assumes no responsibility.
