{"id":60087,"date":"2014-09-09T16:37:31","date_gmt":"2014-09-09T20:37:31","guid":{"rendered":"http:\/\/countingpips.com\/?p=60087"},"modified":"2014-09-09T16:37:31","modified_gmt":"2014-09-09T20:37:31","slug":"what-chimpanzees-can-teach-us-about-convertible-bonds","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2014\/09\/what-chimpanzees-can-teach-us-about-convertible-bonds\/","title":{"rendered":"What Chimpanzees Can Teach Us about Convertible Bonds"},"content":{"rendered":"<div id=\"inves-1243778277\" class=\"inves-below-title-posts inves-entity-placement\"><div id =\"posts_date_custom\"><div align=\"left\">September 9, 2014<\/div><hr style=\"border: none; border-bottom: 3px solid black;\">\r\n<\/div><\/div><h4><span style=\"font-size: small;\">By Dennis Miller &#8211; <a href=\"http:\/\/www.millersmoney.com\/go\/ucdfv-2\/PIP\">millersmoney.com<\/a><br \/>\n<\/span><\/h4>\n<p>In a renewed commitment to finally learn Spanish, one of my colleagues spent quite a bit of time this week awkwardly saying, \u201cQu\u00e9 es eso?\u201d into the headset Rosetta Stone provides with its language learning programs. Translation: \u201cWhat\u2019s that?\u201d<iframe loading=\"lazy\" src=\"http:\/\/trk.caseyresearch.com\/f\/?content_id=984&amp;code=PIP&amp;editorial=what-chimpanzees-can-teach-us-about-convertible-bonds\" width=\"1\" height=\"1\" frameborder=\"0\"><\/iframe><\/p>\n<p>Here in the US, the 10,000 or so people reaching retirement age each day often find themselves asking the same question\u2014though maybe not out loud\u2014when advisors use terms of art or casually mention sophisticated investment options. <em>What\u2019s that? <\/em>Most of these folks didn\u2019t earn their living in the financial services sector, so they don\u2019t speak the language\u2014nor should they feel embarrassed about it.<\/p>\n<p>That said, no one\u2014particularly risk-adverse retirees\u2014should ever invest in something they don\u2019t understand. So let me add one more type of investment to your \u201cI know about that\u201d toolbox: convertible bonds. Despite their obscurity, they\u2019re not the least bit complicated.<\/p>\n<p>Put simply, convertible bonds:<\/p>\n<ul style=\"margin-bottom: 2px;\">\n<li style=\"margin-bottom: 2px; margin-left: 36px; margin-right: 0px; text-align: left; text-decoration: none;\">have, as a rule of thumb, two-thirds of the upside of common stock and one-third of the downside; and<\/li>\n<li style=\"margin-bottom: 2px; margin-left: 36px; margin-right: 0px; text-align: left; text-decoration: none;\">can be an excellent way to diversify your portfolio.<\/li>\n<\/ul>\n<p>Convertible bonds are bonds an investor (let\u2019s say it\u2019s you) can convert into common stock of the issuing company under certain circumstances. Imagine, for example, that Rosetta Stone wants to finance a new project\u2014maybe it\u2019s doing R&amp;D on how to teach humans to speak the language of chimpanzees (hey, this is purely hypothetical). So Rosetta Stone (RST), which has a current stock price of about $8.80, issues a convertible bond and sets the conversion rate so that it\u2019s not profitable to convert your bonds unless the stock price rises, say to $11.<\/p>\n<p>Then more people start to feel a burning need to learn Spanish\u2014or Mandarin, or Farsi\u2014and RST\u2019s price passes $11. At that point, you can convert your bonds into shares of RST worth more than the stream of payments from the bond alone. You own bonds with upside potential.<\/p><div id=\"inves-715843805\" class=\"inves-in-content inves-entity-placement\"><hr style=\"border: 1px solid #ddd;\">\r\n<div id=\"inpost_ads_header\">\r\n<p style=\"font-size:10px; float:left; color:#666;\">Free Reports:<\/p><\/div>\r\n<div id=\"inpost_ads\"> \r\n<p style=\"font-size:15px; float:left;\"><a href=\"https:\/\/goo.gl\/1ApBOV\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/investmacro.com\/wp-content\/uploads\/2018\/06\/graph_techs_PD.png\" align=\"left\" width=\"80\"  height=\"55\"\/><\/a>\r\n\t     <a href=\"https:\/\/goo.gl\/1ApBOV\"><b><u>Get Our Free Metatrader 4 Indicators<\/u><\/b><\/a> - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter<\/p><br><br>\r\n<br>\r\n<br>\r\n<p style=\"font-size:15px; float:left;\"><a href=\"https:\/\/goo.gl\/f3RrHX\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/investmacro.com\/wp-content\/uploads\/2019\/01\/cot_pie_80.png\" align=\"left\" width=\"80\"  height=\"55\"\/><\/a>\r\n\t    <a href=\"https:\/\/goo.gl\/f3RrHX\"><b><u>Get our Weekly Commitment of Traders Reports<\/u><\/b><\/a> - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.<\/p><br><br>\r\n<\/div>\r\n<hr style=\"border: 1px solid #ddd;\">\r\n<br><\/div>\n<p>If RST\u2019s price goes up, the value of your convertible bond goes with it. If it goes down, the discounted stream of underlying cash flows (the bonds\u2019 coupon payments plus return of the principal at maturity) act as a price floor.<\/p>\n<p>Now imagine that speaking multiple languages goes out of vogue, and instead of rising past $11.00, RST drops to $4.00. You\u2019ll still receive interest and principal\u2014meaning your convertible bonds can\u2019t be worth less than those payments.<\/p>\n<p>Of course, there\u2019s always the threat of default. Say Rosetta Stone goes bankrupt for one reason or another (maybe it overspent on the chimp project, and it failed). The silver lining is that you\u2019ll have a better chance of getting some money back than if you owned common stock.<\/p>\n<h3><strong>What You Trade for the Option to Convert<\/strong><\/h3>\n<p>As with any investment, there are tradeoffs: convertible bonds have slightly lower yields. The company pays a lower interest rate, and in exchange you have the option to convert your bonds. Also, convertible bonds often fall into the high-yield\/junk-bond category.<\/p>\n<p>What\u2019s more, it\u2019s often only feasible for individuals to invest in convertible bonds through convertible bond <em>funds<\/em>. And you know what that means: fees. With an average expense ratio of 1.25%, fund managers have to get past that hurdle before they can start making you money.<\/p>\n<p>With that, why would anyone want to buy a convertible bond fund? In a word, diversification. We hold one convertible bond fund in our retirement-specific portfolio for downside protection and the diversification it provides. With a gross expense ratio of 0.4% and one-third of its holdings in investment-grade bonds, this particular fund avoids the major pitfalls of most convertible bond funds.<\/p>\n<p>Less common investments are worth knowing about, but understanding them doesn\u2019t mean you should jump in whole hog\u2014particularly when you\u2019re investing your retirement nest egg. And that\u2019s our focus at <em>Miller\u2019s Money<\/em>: plain-English financial education and smart retirement investing. <a href=\"http:\/\/www.millersmoney.com\/go\/ucdrt-2\/PIP\" target=\"_blank\">Read our free weekly e-letter, <strong><em>Miller\u2019s Money Weekly<\/em><\/strong> every Thursday by signing up here.<\/a><\/p>\n<p>&nbsp;<\/p>\n<div id=\"xvMdV95u77zU\" style=\"clear: both;\">The article <a href=\"http:\/\/www.millersmoney.com\/go\/ucdcu-2\/PIP\" rel=\"permalink\">What Chimpanzees Can Teach Us about Convertible Bonds<\/a> was originally published at <a href=\"http:\/\/www.millersmoney.com\/go\/ucdfv-2\/PIP\">millersmoney.com<\/a>.<\/div>\n<div style=\"clear: both;\"><\/div>\n<div style=\"clear: both;\"><\/div>\n<div style=\"clear: both;\"><\/div>\n<div style=\"clear: both;\"><\/div>\n<div style=\"clear: both;\"><\/div>\n","protected":false},"excerpt":{"rendered":"<p>By Dennis Miller &#8211; millersmoney.com In a renewed commitment to finally learn Spanish, one of my colleagues spent quite a bit of time this week awkwardly saying, \u201cQu\u00e9 es eso?\u201d into the headset Rosetta Stone provides with its language learning programs. Translation: \u201cWhat\u2019s that?\u201d Here in the US, the 10,000 or so people reaching retirement [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-60087","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/60087","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=60087"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/60087\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=60087"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=60087"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=60087"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}