From: ERIC@hup.ucla.edu (Eric J. Splaver)
Subject: Re: Convertible Bonds (One more time!)
Organization: UCLA Honors & Undergraduate Programs
Date: 7 Sep 92 18:38:24 PDT

In article <BtwMo4.3pv@encore.com> rcollins@encore.com (Roger Collins) writes:

>No one responded to my request for info. on convertible bonds,
>so let me be more specific and challenge you by saying, does anyone
>know anything?
>
>What do these fields mean:
>
>Current Yield,

This is the rate you would earn if you purchased the bond at it's current 
price.  For example, if a bond had a coupon rate of 10%, and it was trading 
at par (100), the current yield would be 10%.  If it was trading at 50, the 
current yield would be 20%, etc.  If you like formulae:  

Cur Yield=(Coupon Rate)/(Current Price/100)=100(Coupon Rate/Current Price)

>
>Yield to Maturity,
>

The annualized yield you would earn if you held the bond to maturity.  
There are several different formulae used, each with their own assumptions
(regarding the reinvestment of interest, etc.) and simplifications. 
Often the "Yield to Call" is more important as many bonds may not live to 
maturity.


>Bond Close (seems to be around 100 usually, do you multiply
>by 10 to get the price of a $1000 bond?  Are all these bonds
>$1000 when issued?)

Bond prices are quoted as percents of par, so 100 is par value.  A 
bond selling below 100 is said to trade at a discount, while bonds costing 
more than 100 are said to trade at a premium.

Corporate bonds usually trade in $1000 units so multipling by 10 will give 
you their price.

No, not all bonds are issued at par.  Zero coupons, for example, have no 
coupon rate (hence the name) and instead issued at a discount.
 

>Conversion Price (How does conversion work?  Is $1000 for
>each bond converted to stock at the conversion price?)

Conversion priviledges vary but a convertable can always be traded 
for some specific number of shares of the underlying stock.  The actual 
conversion is normally not done, since the bond's price will rise 
with the stock.  Convertables generally cost more (pay less) than non-
convertables, but the potential for enhanced return might make them 
worth it.    

>
>Lastly, % Premium
>

There are several premiums related to these bonds.  If the bond trades over 
100, it is said to trade at a premium.  Here the premium would be the amount 
over 100.  Convertables trade at a premium over the conversion value of the 
underlying stock, usually around 20%.  The premium is based on the reduced 
risk of bond ownership vs stock ownership.

There are other bond features you didn't ask about which relate to all bonds 
including convertables.  Such as call and put features.  A call feature is
the right of the issuer to buy the bond back at specified times for 
specified prices.  Call features diminish the issuer's risk of 
declining interest rates and are _bad_ for the investor.  Bonds with call 
features generally offer higher rates of return to compensate.  A put 
feature gives the investor the right to force the issuer to buy back 
the bond, thus diminishing the investor's risk of interest rates 
increasing.  Bonds with put features generally offer lower rates of 
return.  Request the prospectus so that you fully understand what your 
buying.  There are some bargains out there since convertables are 
not as fully understood by the public as say 3 or 6 month treasuries, but
you need to know the whole story.
        

________________________
Eric J. Splaver
eric@hup.ucla.edu
(310) 825-2768