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The Cons of Convertible Bond Investing

Convertible bonds are still in vogue, but proceed with caution around the bend.

This story appears in the March 2004 issue of Entrepreneur. Subscribe »

When markets are volatile, investors love a good hybrid . Give them the stability of debt and the potential upside of equity, and they tend to feel a lot better about handing over their to growing companies-which explains why convertible had another great year in 2003. The amount raised in new convertible bonds-$85.6 billion-was the second highest in history, according to a December 2003 research report.

In 2003, smaller companies in particular benefited from the surge in convertible activity. According to the report, the percentage of convertible new issues from small-cap companies increased dramatically-from 46.7 percent of the total in 2002 to 63.9 percent in 2003-while the percentage of new issues from S&P 500 companies fell to 24.1 percent from 42.8 percent. Convertible bonds are essentially debt with a twist: In addition to getting steady interest income, the investor has the option to convert the debt to equity by buying the company's stock at a fixed price in the future.

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