CONVERTIBLES AS STOCKS

Convertible securities do not appreciate as much as their underlying stock. However, they do provide investors with a regular source of income while the investors wait to capitalize on the convertible's stock value.

Investors buy convertible bonds because they pay interest and offer the potential for appreciating capital. They also provide increased downside protection. If the underlying stock price drops, the investor still has the value of the bond's fixed interest to fall back on.

An increase in the price of the underlying stock usually leads to an increase in the price of the convertible bond. Convertible investors protect themselves against price loss without sacrificing the opportunity to cash in when stock prices rise.