Convertible Securities

This section of All about Bonds discusses convertible securities. Convertible securities usually refer to bonds or preferred stocks. Convertible bonds are the most common type of convertible securities. Other convertible securities are convertible preferred securities and beneficial unsecured convertible securities. In many portfolios, convertible securities can be very beneficial.

What are convertible securities?

Convertible securities (convertible bonds and convertible preferred securities) combine the characteristics of bonds and stocks, providing competitive current yields plus capital gains opportunities and significant downside protection.

Like bonds, convertible securities offer investors a fixed rate of interest and return of principal at maturity. This quality makes convertible securities a unique investment product.

The features of convertible securities for convertible bonds and convertible preferred securities

The convertible feature of convertible securities, however, gives investors the opportunity to participate in the potential appreciation of the issuer’s common stock, when the convertible security (convertible bond or convertible preferred security) is converted.

Convertible securities are assigned credit quality ratings and are offered in $1,000 denominations. They generally have two- to ten-year maturities, although most convertibles are callable.

In addition to traditional convertible securities, there are a variety of other synthetic convertible structures including:

• PEPS (Premium Equity Participating Shares),
• PERQs (Performance Equity-linked Redemption Quarterly Pay securities) and
• SPARQS (Stock Participating Accreting Redemption Quarterly-pay Securities).