Are Convertibles Available?

For the life of me, I don’t understand why people would by stock in this market when convertible bonds in that same company is available? The only thing that I can think of is that people just don’t know anything about convertible bonds. Some people say that companies only sell convertibles when they are in financial trouble. Well, you don’t want to buy stock in companies that are “flying high.” The only way they can go is down. You want to buy turn around companies if you want to make any money.

According to Investopedia; “A convertible bond is a bond that can be converted into a predetermined amount of the company's equity (stock) at certain times during its life, usually at the discretion of the bondholder.” Convertibles are sometimes called "CVs".

Investopedia goes on to explain;

“Issuing convertible bonds is one way for a company to minimize negative investor interpretation of its corporate actions. For example, if an already public company chooses to issue stock, the market usually interprets this as a sign that the company's share price is somewhat overvalued. To avoid this negative impression, the company may choose to issue convertible bonds, which bondholders will likely convert to equity anyway should the company continue to do well.”“From the investor's perspective, a convertible bond has a value-added component built into it; it is essentially a bond with a stock option hidden inside. Thus, it tends to offer a lower rate of return in exchange for the value of the option to trade the bond into stock.”

If I wanted to buy LIBERTY MEDIA CORP stock for example, why do that when I can buy the LIBERTY MEDIA CORP SR EXCH 3.25% of 2031 Convertible - Callable 10/10@100 instead. The stock gives no dividend. But the convertible bond will give me a “Yield to Maturity” of 6.435%. If I plan to sell the bond because I want to take advantage of the stock appreciation, my current yield would be 5.078%. So I get paid 5.078% while I wait for the stock to go up. The bond sold for $640 on Sept. 3, 2010. If called away from the investor, they get $1,000. It is a Standard and Poor’s BB- bond.

The only risk that I may be taking is bankruptcy or business risk. The risk that inflation will be above 5% for the next 21 years is considerable but I can sell my bonds anytime I like. It already sells at a deep discount to par ($1,000).

You can do a bunch of calculations to see when you should convert your bonds into stock or if you are getting a good value with your Convertible Bond.

Here is a link to a website that teaches you how to do this.
http://thismatter.com/money/bonds/types/convertible_bonds.htm

I am too lazy to do all that work. If I am too lazy to wash my car, why do you think I would want to do a bunch of math? I rather watch CSpan and find out who is going to get what contract or where the money will be spent in the Federal Budget. Then buy the Convertible Bonds in that industry or company.

In the late 1970s, I read that President Carter was putting together a plan to rebuild the US Military. So I started looking for Convertible Bonds to buy in the Aircraft industry. I bought a Convertible Bond Issue on a Monday at $1,000 each giving 8% interest. In the late 1970s, inflation was running around 10% so I really was not making any money off of the Bond Interest. I wanted to make the money off the stock. That Wednesday, the company was awarded a big contract. By Friday afternoon, the bond sold for $2,000 each. That is when I sold. One Hundred Percent Profit in 5 days. Then I went out and paid cash for a new car.

So when your broker asks you if you want to buy stock in a company, ask the broker if they have a convertible bond available?