The different types of bonds in which you can invest also include convertible bonds. These are financial instruments that offer an interest rate on your investment in the same way as the more well-known government or corporate bonds.

However, convertibles differ from other bonds as they have a “conversion option”, whereby the bondholder can choose – at certain times and under pre-determined conditions – to convert the original investment into shares before the bond reaches maturity.

In other words, investors buying convertible bonds are able to decide before maturity whether to convert their bonds into shares in the same company or organisation, and become a shareholder rather than a creditor.

What are the advantages of investing in convertible bonds?

The advantage of investing in convertible bonds is that it lowers the risk of suffering a loss on the investment, because the investor can take advantage of an increase in the share price or keep the fixed-interest bond if the share price goes down. So:

• if the share price goes up, the investor can exercise the conversion option and obtain a higher return
• if the share price goes down, the investor can ignore the conversion option, and continue receiving interest on the bond investment

In short, a convertible bond is a financial instrument with a fixed, but relatively low return, which may be increased if the shares of the issuing company perform well.

Moreover, convertible bonds are also attractive to the issuing companies, because they can obtain finance at a lower interest rate then they can get on the market – and if investors convert their bonds, the company gives them shares rather than cash, so the transaction essentially becomes a capital increase.

Convertible bonds can be used by alternative investment funds managed by authorised management companies. (To find out more about Tendercapital alternative funds, such as Tendercapital Alternative II, click here).