convertibles

[salj67]

Convertibles provide higher income than ordinary shares but lower income than conventional loan stock or preference shares. This is a statement made in the core reading.
What i dont understand is how both can be possible together? Return on ordinary is more than preference and hence if return on convertibles is more than on ordinary, shouldn't it be greater than on loan stock or preference also?

 

[Stuart Underwood]

Hi salj67


Remember there are two components to return: income and capital gain. (Return is not the same as income, as return also includes capital gain)

It is true to say that:

(1) Bonds (including convertibles) can offer a higher income than the dividends on equities.
(2) Equities and convertible bonds may give a higher return than "normal" bonds overall, because there is the potential for a capital gain.

Convertibles are somewhere in between bonds and equities, as they start their life as a bond, they normally have a higher income than equities, but usually a lower income than a normal bond as they also offer the potential for a capital gain if the option is exercised.
.

Hope that helps

Best wishes

Stuart

Stuart Underwood
ActEd Tutor

Convertibles provide higher income than ordinary shares but lower income than conventional loan stock or preference shares. This is a statement made in the core reading.
What i dont understand is how both can be possible together? Return on ordinary is more than preference and hence if return on convertibles is more than on ordinary, shouldn't it be greater than on loan stock or preference also?

 

[salj67]

Yes that helped! Thanks alot