Revocation of a bond in Missouri what percentage

Convertible bond

This type of investment is only for experts

Hendrik Buhrs
Expert for banks and stock exchanges As of October 6, 2014

Hendrik Buhrs

Hendrik Buhrs is an editor in the bank and insurance team. Before joining Finanztip, he reported on economic and consumer issues for the radio programs of the Hessian and later of the West German Broadcasting Corporation. Hendrik studied economics in Münster and Exeter. He gained his first professional experience at Radio Q and on Recklinghausen local radio. He likes to invest the money he has saved in travel.

  • Convertible bonds are complex products for absolute experts. They are bonds that you can exchange for stocks at a certain price.
  • Until the bond is exchanged for shares, you will receive fixed regular payments.
  • By converting into shares, you have the chance to achieve price gains if the share performs well.
  • In return, convertible bonds only offer a lower interest rate before conversion than classic bonds.
  • If the share price develops unfavorably, the nominal value of the bond remains at the end of the term. Exception: mandatory convertible bonds are always exchanged for shares.
  • We recommend that you invest in funds rather than individual convertible bonds. Better leave the management of these complex products to the professionals.
  • To find a suitable fund, we recommend using the search on finanzen.net.
  • The cheapest way to buy the fund is through an online broker. Read our custody account guide.

Convertible bonds are bonds with a Suffrage (Option) are equipped. The option grants the buyer the right to exchange his bond at a fixed price for shares in the issuing company. If the investor does not exercise the option, the bond will be repaid at the end of the term at the nominal value.

Because of the high complexity It is difficult to determine the fair price of bonds. They are therefore only for absolute experts suitable. You should invest in convertible bonds by buying a corresponding fund - provided you are convinced that the fund management can make a profit after deducting the costs.

With convertible bonds, you combine one conservative investment with course opportunities of the stock market. However, you have to be prepared to accept a lower interest rate on the bonds.

This is how convertibles work

There are few financial products that allow the issuing company such extensive special regulations as convertible bonds. Therefore, you should know the main characteristics of this type of bond.

Conversion conditions: Within what time and under what conditions a conversion is possible is specified in the conditions of the convertible bond. The conversion price is particularly important for the attractiveness of a convertible bond. It indicates the price you have to pay per share if you exercise the option. Exercising the option is only interesting if, by converting the bond, you get the shares at a lower price than you would have to pay on the stock exchange.

For example, if the conversion price is 20 euros, conversion is advantageous at the earliest when the relevant share also costs 20 euros on the stock exchange. As long as the market price is below this, it is cheaper to buy the shares on the stock exchange.

But even if the market price exceeds the conversion price, it can be more advantageous for the investor to keep the bond than to exchange it. This is especially true if the bond yield is significantly higher than the annual dividend on the stock.

Yield waiver: The chance to get cheaper stocks via convertible bonds has its price. It consists in the fact that you, as the buyer of the convertible bond, receive a lower interest rate than for conventional corporate bonds from the same company or from companies with the same credit rating.

Comparison of convertible bonds and regular bonds from Air Berlin

Typeregular bondConvertible bond
WKNAB100BA1HGM3
Exchange rate-2.82 euros per share
coupon8.25 percentnone (zero bond)
course104.75 percent99.77 percent
Remaining term3 years, 11 months1 year, 8 months
Return7.04 percent per year0.13 percent per year

Source: onvista.de (as of May 9, 2014)

The exchange rate of 2.82 euros per share means that you as an investor will receive 354.6 Air Berlin shares for a nominal value of 1,000 euros in the bond.

This is how the prices of convertible bonds behave

Influence of the share price: The closer the company's share price approaches the price at which conversion would be beneficial, the more the bond price behaves like the share price. If the share price exceeds the conversion price, the bond rises more or less in parallel with the share price. As long as the share price rises and falls above the conversion price, the price of the convertible bond fluctuates with the share price.

Influence of the bond price: In contrast, the price of the convertible bond is almost identical to that of a classic bond, as long as the stock market price of the share is so low that conversion is of no interest to the investor.

Our tip: Always stay up to date - with our free newsletter!

Our tip: stay on the topic [category] always up to date - with our free newsletter!

chances and risks

Convertible bonds offer you opportunities that conventional bonds do not have. In the best case scenario, you can generate real stock returns and are protected from price losses by the regular coupon payments of the bonds. For this you have to make do with a lower coupon compared to regular bonds.

Special rules apply to mandatory convertible bonds: Here, the bond must be repaid in shares at the latest at the end of the term. This can lead to considerable losses if the stock exchange price of the share at the time of mandatory conversion is far below the exchange rate.

If you buy a bond that is not denominated in euros but in a foreign currency, you are taking a currency risk. Another disadvantage is that there are relatively few companies that issue convertible bonds. The market for convertible bonds is small compared to that for classic corporate bonds, which greatly limits the choice. In addition, most of the bonds are out of the question for private investors because the minimum purchase amount is often EUR 30,000 or more.

Comparable alternatives

Convertible bonds have the characteristics of bonds and stocks. Because they are only suitable for investment professionals, you should think about alternatives:

  • If a fixed interest rate is in the foreground for you, you should choose classic bonds.
  • If, on the other hand, you would like to benefit primarily from possible price opportunities, we recommend that you invest directly in stocks or equity funds.

Buying and selling convertible bonds

You can buy convertible bonds either directly or indirectly through funds that invest in such bonds. Buying a fund means that you are spreading risk as the fund management company buys and sells many different bonds. Since fund managers do not usually hold the bonds until the end of the term, but buy and sell them, profits or losses can arise in the process. However, there are costs associated with a fund: You often have to pay one-off sales charges of up to five percent and management fees of around two percent per year.

Nevertheless, we advise you to buy a fund. Convertible bonds are complex products that are best managed by professionals.

If you want to buy a fund that invests in convertibles

We recommend the fund search from finanzen.net. To do this, select "Bond funds" and "Convertible bonds worldwide" or "Convertible bonds / EUR, EUR hedged" for the fund type. Take a look at the key characteristics of some funds and compare them to other funds. This includes:

  • the strategy or investment policy of the fund
  • the composition of the fund by industry and country
  • the price development in recent years
  • the fees such as the initial charge and management fee
  • The type of distribution: does the fund reinvest the income it has received (accumulating) or does it distribute it to the investors?
  • any minimum investment

The easiest size to compare is the cost. Funds with higher costs will always reduce your return if the share price remains the same. If you believe that the fund management can achieve an acceptable return for you, select the appropriate fund.

If you want to buy individual convertibles

You can find individual bonds using the search function on the website onvista.de. To do this, click under “Bonds” on “Search / comparison”, then on “Professional comparison”. Under “Professional filter” you select the “Company” category for “Issuer type” and the “Convertible bond” category for “Bond type”. You also have the option of choosing other features, such as the currency.

When looking for a convertible bond that is suitable for you, find out about the most important features of the bonds. Pay attention to the rating because it gives you an idea of ​​the credit risk associated with each bond. You may need to research the rating on the website of the company that issued the bond.

Make sure when and at what price the bond can be exchanged for shares and whether the conversion is voluntary or mandatory.

Another important key figure is the return that you can expect until conversion or until the end of the term if the option right is not exercised. It is determined by the current price, the coupon and the remaining term of the bond.

Also make sure what currency the bonds are denominated in. If it is a question of euro bonds, you do not take any currency risk.

Buy the fund or bond from an online broker

Make a note of the securities identification number (WKN) or ISIN number of the fund or bond that you have decided on and give your bank the order to buy the bond. We recommend that you make the purchase through a direct broker, as they often offer favorable conditions. Read more in our securities account guide.

More on this in the securities account guide

  • With the right securities account, you pay little for buying and selling equity funds (ETFs).
  • Finanztip recommendations: Among the cheap and versatile custody accounts did the best: ING, Comdirect and Consorsbank and DKB. The cheapest providers are: Smartbroker, Scalable Capital (Free Broker) and Trade Republic.

To the advisor

Dr. Manuel Kayl

Dr. Manuel Kayl

Manuel Kayl was responsible for investment topics at Finanztip. The doctor of physics worked as an investment strategist and risk manager at the Dutch insurance company a.s.r. after doing research at the Geneva research center Cern as well as at Nikhef and the University of Amsterdam. He left Finanztip on August 31, 2016.

* What the star means:

With our recommendations, we want to help as many people as possible to do their own finances. Our content is therefore available online for free. We finance our extensive work with so-called affiliate links. We mark these links with an asterisk (*).

At Finanztip, however, we handle affiliate links differently than other websites. We only link to products that were previously recommended by our independent expert editorial team. Only then can the relevant provider set a link to this offer. We get money if you click on such a link or conclude a contract with the provider.

Whether and to what extent a provider pays us has no influence on our recommendations. What our experts recommend to you depends solely on whether an offer is good for consumers.

You can find more information about how we work on our About Us page.

^

+++ Get our tax series +++

  • The 7-part Finanztip tax series especially for the 2020 corona year.

  • Tips on how to get the most out of it and which control software can save you a lot of time.

  • Free in our Newsletter. Register now!