Hi David, I've had some experience with conv. bonds (actually still hold some) and it's all been quite favorable so far.
It wasn't that method that I chose, seeing as I didn't know about it! It was one divised of my love of AIM and need for income. When I looked at some riskier stock selections I'd also look for convertible bonds from the same company. If there was one available, then I'd start to look at what the yield on the bond was currently, the expiration date, the yield to maturity and finally the conversion rate.
My next step was to compare the current yield to what money market rates were currently. I would build a Bond/Equity ratio that would yield the same as money market rates. (this, of course, assumes the yield is somewhat above the mmf current rate!) Let's assume that the current MMF rate is 4%. I'd look for bond funds that were yielding 8% on a current basis. Then buy bonds with half the money and the stock with the other half. The average yield would be 4% for the total, assuming no dividend on the stock, but I have tradeable stock and get income to boot.
Usually, to get the high yield the bond would need to be deeply discounted. For instance, it might be a 4% on the "face" value of the bond when it was issued. However, with a bad quarter or three, the stock would be depressed and so would the bond. The face value of the bond might be sold at 1/2 the actual original cost.
Let's see, we buy a $1000 bond earning 4% discounted by 50%, that gives us a yield of 8%! Hmmm, this is sounding interesting! Let's say the bond matures in 2015. So, if the company survives and they don't default, then I collect 8% from the bond for 10 years. Then, if all's well at the end, they'll pay me $1000 for the bond that I bought for $500. That's an additional 7.2% on the investment per year on average. So my actual yield is about 15.2% on that side of the equation.
On the other side, we use AIM to manage this jumpy stock with unsteady earnings. It generates its own profits through trading. Should management get their act together, we may hit a home run with the stock.
Back to the Bond - if management hits a home run, then the bond will rise back to its original face value much sooner. Also, if the stock rises to the conversion price, you may be able to collect well beyond the the face value of the bond if they buy it back or convert.
All in all it worked out very nicely. The last one I had mature was ICA's bond. I bought those bonds effectively at $0.33 on the dollar. The yield was 5% at face value giving me 15% at my cost. I held them for 9 years earning that rate and then the bonds matured and I got $1000 for each $333 I invested. Not bad!
I'm still holding some Maxtor bonds purchased in the early '90s with an effective yield of over 10%. Can't remember when they mature, off hand.
I've not done this in more recent years only because the convertible bond market sort of dried up for a while. Now with interest rates starting to rise again, we may see the issuing of some more of these nice vehicles.
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At most libraries there will be the S&P Bond Book. It's issued each month and in the very back is the convertible bond section. You can look through it for names you recognize or run your finger down the "Current Yield" column until you find something attractive. I've done both. I've found an effective yield that I thought was worthy and then researched the company that issued the debt. I've also looked for stocks I know to see if there happens to be some convertible paper around for it. Both have worked for me.
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I don't remember ever having researched prices on bonds via "on-line" sources. I've always called my discount broker and spoken to a Flesh and Blood for the information. You need to be able to tell them about the bond. Tell them the name of the company, the percent yield and date of maturity of the bond as it is listed. For instance, you'd tell them its a , "Maxtor Corp, 5% - March, 2010 bond." He will be able to look it up. If its relatively actively traded he'll be able to get an immediate quote. If it's thinly traded (most are) he'll probably have to get back to you with a quote. The S&P Bond book will get you in the ball park, but you'll need a firm quote for actually buying.
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That's about all I know on the subject.
Best regards,
Tom
Port Washington, WI 53074
