Convertible bonds

Convertible bonds are hybrid securities that combine the investment characteristics of corporate bonds and common stocks. As with conventional bonds, convertible bonds have a fixed interest coupon, and a fixed term, at which an investor is due to receive a return of principal. In addition convertible bonds have a conversion right, described in the bond prospectus, that entitles the investor to convert the bonds into a predetermined number of stock shares.

The first convertible bonds were sold by US railroad companies in the mid nineteenth century. The contemporary convertible bond market is global, with securities being issued in the US, Europe, Asia Pacific ex Japan, and Japan.

Characteristics

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 * align = "center"| Figure 1: Convertible Bonds
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Risks

 * Credit risk


 * Equity risk


 * Call risk

Index funds
State Street offers the SPDR® Barclays Convertible Securities ETF (CWB), tracking the, Barclays U.S. Convertible Bond > $500MM Index. The fund has an expense ratio of 0.40%.

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