Friday, April 17, 2009


hybrid convertibles After decades of price inflation,investors have become wary of putting their funds in bonds which merely repay the principal in dollars that have deteriorated in purchasing power.To tempt them back into bonds,corporations have increasingly had to resort to convertible bonds.Thus Standard Oil of Indiana has sold $1,000 bonds that pay 5 per cent interest and come due in 1996.These could be sold at so low an interest rate only because each bond is made to be convertible at the owner,s will into 20 shares of S.O. (Ind.)common stock.The investor can,so to speak,have his cake and eat it too. If prices stay steady,he has a nice safe bond.If inflation or anything else sends S.O.s stock far upward,he can convert and protect the real purchasing power of his principal.
Similarly,we today often meet convertible preferred stock (as in the case of American Express Pfd., which is convertible into one share of common in addition to paying an annual dividend of $1.50).
Finally, some companies issue warrants,which are options to buy the common at some stated exercise price until some future date : thus there is a B.F. Goodrich warrant,good until 1979,which permits me to buy a share of its common by paying $30,00 of exercise price.Such warrants are very volatile,often moving in a "leveraged" way in comparison with the common;hence,you can make a lot on them if you are right,but you can also lose your shirt.

No comments: