Question

how are convertible bonds different from put bonds?  Which bond would make more sense, from an investor’s viewpoint, in a low interest rate environment?  Why?

Answer 1

Convertible bonds and put bonds difference-

• Convertible bonds protects the principal of an investor and offers low coupon rate to convert the bonds into common stock. Put bond allows the investor to repurchase the security before the maturity.
• Convertible bonds return percentage is more than put bonds due to higher liquidity.
• Convertible bonds provides both the right and obligation to the investors. But in case of put bond only rights not the obligations.
• Convertible bonds generates higher capital appreciation and growth potential to the institutional investors rather than put bonds.

Followings are the reasons for which convertible bonds are the best option for investors in comparison to put bonds:

1. It ensures high earnings per share (EPS) which resulted in stable operating income for the stakeholders in low interest environment.
2. They have the voting control once it is converted to common stock.
3. Its a kind of hybrid instrument. So that the amount of risk involved is comparatively less than put bonds.