Convertible Bonds and Zero-Coupon Bonds

What to know about convertible and zero-coupon bonds
Convertible bonds and zero-coupon bonds have similar features that are also common to stocks.

First of all, one buys bonds because of their regular income payment and for their return of principal at maturity. And one invests in stocks mainly because of their appreciation of capital and income generation if they pay dividends.

Convertible bonds provide incomes and appreciation of capital if the stock of the issuing company increases its value. Zero-coupon bonds are the most volatile of all the different types of bonds. Prices of zero-coupon can boost and dwarf in the same way as a roller-coaster when market interest rates fluctuate. The negative aspect of convertible and zero-coupon securities is that if the bond and stock market declines it is these securities which are more affected or hit.

Corporation AMR, a close relative of American Airlines Company, has to retire from the market  an offer of $25 millions in 20-year convertible bonds due to the combination of a weak bond market and the poor quality of credit of the company.

With the ups and downs of the stock market many mutual funds have searched for innovations to keep investors safe from losses. The result of this action had as  consequence a growth of  “principal protected” mutual funds, which could evidently protect principal but also could deny earnings over capital.

Some of the investments that these funds chose where zero-coupon bonds because of the low yields on treasury notes and bonds.

The European company of  semi-conduits ST Microelectornics NV issued $1.2 billions in convertible zero-coupon bonds with a maturity term 2010. Because in this issue zero-coupon and convertible bond market come together, as it also involves equity markets, investors will need to understand the combination of factors of each market respectively. In addition to the specific terms of the issue that can affect returns on that investment.