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What Should a Convertible Have?

© Naeem Akhtar

Convertibles aren't as safe as straight bonds, which have first call on the issuer's assets in case of trouble. Stick to bonds rated at least BBB, unless you're so familiar with the company that you have no doubt of its financial stability. Stability therefore, is a key issue when selecting an investment portfolio consisting of convertibles.

Also, make sure the bond isn't callable (redeemable before maturity) for less than your purchase price; otherwise, a call might force you to convert and cost you the premium you paid. And pay close attention to the conversion terms; not all convertibles remain exchangeable for stock at the original issue terms.

If these complexities daunt you, consider a convertible bond mutual fund whose investment policies match yours. Some funds aim for big returns by concentrating on comparatively low-grade issues. Others favor high-quality bonds with limited risks, even though yields may he lower. It is up to you to decide the term and tenure for investment but carefully weigh the return-risk factor before making the final decision.

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