• Convertible bonds have benefits and downsides.savings bonds image by judwick from Fotolia.com
  
  Convertible bonds are company-issued bonds that act as a hybrid between a stock and a bond. The bond can be sold either at an agreed-upon stock price, cash of equal value or be held for the compounding of interest. This type of investment has multiple benefits and downsides. Some downsides include a high conversion price, stock decline leading to convertible bond decline and a large degree of control in the hands of the corporation. That said, depending on your investment situation, convertible bonds may be the right decision for you.
  
  

Interest

• Convertible bonds typically are sold to an investor with a conversion rate at a specific percentage above the current market price of the stock. To reward you for this bond purchase, the bond collects interest while you hold it. The longer you hold the bond, the longer it collects that interest. This interest is still paid to the investor even if the stock price does not rise, which would not occur if a regular stock was purchased. The interest rate is lower than most bonds, but if the stock rises to the conversion rate while the interest is compounding, the investor makes more than a regular bond.
  
  

Protection

• If the market takes a rapid downturn, a convertible bond protects the investor from a major loss. While a stock might fall 10 percent, a convertible bond in the same company will fall only around 5 percent. In fact, a stock could fall a small amount, and the interest on the convertible bond still could yield a gain over a year.
  
  

Supporting Up-and-Comers

• Convertible bonds are often investments in small and mid cap companies. These companies offer convertible bonds to give them more capital to work with so they can grow. If the company succeeds, the investor has the ability to convert the bonds into stock shares that are valued higher than the bond. While not all companies will explode with growth and success, the convertible bond gives you more flexibility if it is successful.
  
  

Tax Advantages

• Convertible bonds have benefits for the company issuing the bonds and the investors purchasing the bonds. A convertible bond has a lowered gross income than the shares that the bond represents. A high-paying tax shareholder receives a benefit from mandatory convertibles, in which the company takes extra security out on their convertibles and the income of the bond can be set against taxable profits.