Another alternative to traditional
bonds are convertible
bonds. These hybrid investments give you the option
of exchanging the bond for a specified number of stock
shares at a set price.
Convertible bonds can provide protection from interest
rate risk, since you can convert your bond to shares if
interest rates and inflation rise. Another benefit is that
convertible bonds have relatively low correlations with
traditional bonds, so they can be used to balance a fixed-income
portfolio. However, their correlation with equities is
high, making them less useful in a portfolio tilted toward
stock and stock mutual funds.
You can purchase convertible bonds through a broker or
choose a mutual fund that invests in them.
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates 