Stock Gains with Bond Safety: Convertibles

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Are you a bond or stock investor? Many investors are either one or the other.  The former investors like the security of a solid, fixed-income financial vehicle, and the latter want to enjoy the potential high returns of stocks and are willing to take some risks with their capital. Few know of a financial vehicle that can give you the benefits of both. Meet the hybrid security: the convertible bond.

Some investors purchase only stocks, whose prices can be volatile, with no guarantee of gain and no safety net for capital loss. Others purchase only government bonds, missing out on the higher yields of corporate bonds. Most investors are not familiar with the convertible bond which is yet another bond type that can be very profitable. It carries the upside of stocks without as much associated risk.

A convertible bond is a corporate bond with regular, guaranteed interest and principal payments, but with a kicker: this bond can be converted, if the holder desires, to stock of the same company. This option on the stock allows the bond price to vary with the price of the stock, without the possible downside of owning the stock and riding its volatility. If the stock price goes up, the price of the bond goes up, and the bondholder can convert his bonds to stock to continue the ride upward.

But, the bond need not be converted to profit from the rising of the stock price: the bondholder can enjoy the price appreciation and continue to receive interest and principal payments. Israeli convertible bonds are liquid and traded on the Tel Aviv Stock Exchange, so capital gains on convertible bonds can be realized virtually at any time by selling the bond.

Here are a few Israeli convertible bonds to consider:

  • Ogen Yielding Real Estate: Real Estate and Construction (76% stock gain YTD)
  • British-Israel Investments: Real Estate and Construction (34% stock gain YTD)
  • Delek Group: Investments in energy, car import and finance (35% stock gain YTD)
  • Space Communications: Satellite communications (16% stock gain YTD)
  • Scailex Corporation: Communication and media - Orange Israel cellular telephone carrier parent company (12% stock gain YTD)

If the company's stock price goes down, the convertible bond suffers much less in price, and interest payments and principal are still paid on the full amount promised. Thus, if the bond is held to maturity, there is no downside to the originally promised Yield to Maturity (YTM).

This gives the convertible bondholder the potential upside of a stock, while providing the downside protection of bond interest payments with the principal guaranteed. The worst case, usually, is that the stock price doesn't rise (although a convertible bond can go down in price just like any other security), and then the bondholder receives the agreed upon regular interest payments. The best case is that the stock price rises, and the convertible bond price rises with it. In this way, a solid bond can make double-digit returns without the risk of owning stock (with double-digit loss potential).

For a more full explanation on convertible bonds, and more details about which Israeli convertible bonds can be the most profitable, please contact Wise Money Israel.

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