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Jazz Up Your Bond Portfolio... Page 2
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Consider Amazon.com [AMZN]. Even though you may have faith in the company in the long run,
in the short run, there is no doubt that the company is plagued with financial problems.
Struggling divisions, cash shortfalls, debt and negative earnings. But, amazon.com has
several convertible bond issues that might be a safer bet than buying the stock. If you
buy the convertible securities issued by a company like amazon.com, you get the upside
potential of a big player in the Internet market but with the downside protection that you
have with a bond. It's hard to beat that. The price of the amazon.com is currently at or
near a 52-week low. In addition, the conversion premium is low. For its 2009 issue of
convertibles, the premium is only 24%. If you own the convertible, you are somewhat
protected on the downside as you're cushioned by the coupon payments and value of the
bond. In addition, the stock price only has to go up by 24 percent for the convertible to
be in the money. If you look at investments in convertibles with higher conversion
premiums, realize that you are taking increased risk.
Keep in mind credit risk of convertible bonds. If the underlying stock price of a company
making heavy use of the convertibles market drops, can these companies generate enough
cash to pay back their bonds? It's clear that many technology companies or New Economy
firms could and would. It's just as clear that others would have a hard time meeting that
commitment.
One downside of buying individual firm convertible securities is that there aren't that
many firms that issue them. They are also hard for an individual investor to track. The
best strategy may be to invest in a good convertibles mutual fund and there are several
out there. Located in Chicago, IL, Morningstar.com, the premier investment ranking service
for mutual funds, stocks, and variable-insurance investments, tracks 56 convertible funds.
Those funds gained, on average, 30 percent during 1999 -- more than the average domestic
stock fund!
If you decide to explore an investment in a convertible bond mutual fund, carefully
examine the holdings of the fund and realize that, if the fund holds a large percentage of
common stock, it will be riskier than a fund that doesn't. Instead, you might look for a
convertible mutual fund with a heavier investment in bonds than stock. In any case,
convertible securities give you a way to take advantage of riskier investments with at
least some downside protection so they may be worth a look as an addition to your
investment portfolio.
Copyright © 2000 Rosemary Carlson.
Rosemary Carlson is a freelance columnist and
feature writer in personal finance, investments and the financial markets. She has been a
Professor of Finance at Morehead State University for 18 years and worked extensively in
the online learning area in finance. Visit Dr. Carlson's homepage at http://www.carlsonwriterprofessor.com or
email her at rcarlson@mis.net. |
