Investing in Convertible Bonds

Convertible bonds are a hybrid security that gives investors the option to exchange their bond for shares of a company’s stock. This type of investment can provide higher returns than corporate bonds and help diversify a portfolio.


The BMW M4 convertible may look flimsy, but crash statistics show it’s no riskier than nonconvertible versions of the same car.

Open-Air Driving

The primary appeal of convertibles is the open-air driving capabilities they offer. They give you the freedom to feel connected with the world around you while providing shelter from rain, wind, and other elements. If you’re shopping for a convertible, consider whether you want to get an older model that requires you to manually wind down the roof or a newer type that allows you to press a button and retract it with minimal effort. Also, if you want to save money, be sure to consider used vehicles as well as new ones. New convertibles come with the latest safety gear and engineering improvements, and they have the advantage of a bumper-to-bumper factory warranty.

The popularity of convertibles has been declining over the years due to a shifting consumer demographic and escalating efforts towards electrification. However, convertibles still make up a healthy proportion of sports car sales.

A convertible is also known as a cabriolet or a ragtop and features a folding roof that allows you to enjoy open-air driving while giving you the option of protecting yourself from the weather. Convertibles can be made with either a hard or soft top and they can be made in both two-seater models and four-seater models. Some convertibles feature a retractable hardtop while others have a detachable fabric roof.


As the weather warms up convertible owners often think about getting their summer car out on the road. While it’s true that convertible cars are pricier than sedans and coupes many drivers find that the ability to open the roof on a sunny day is worth the extra cost.

When the top is down the sound of wind in the hair, the rumble of the engine and traffic noises make for an exciting ride. However, these things also make it harder to hear your music or converse with passengers. In addition, if the wind is blowing a lot it will create soggy spots in areas like the dashboard and armrests. Persistent leaks can lead to interior damage and odor.

Convertible notes enable founders to avoid the additional legal fees that typically accompany equity financing by allowing early investors to choose whether their investments should convert into equity at the next priced round or remain as bonds. This feature can be particularly helpful for startups in their earliest stages where the company’s valuation may not yet have reached a level that would be attractive to investors who have already invested.

The lack of a fixed roof means that a convertible is more susceptible to the kind of damage that can occur in high-speed crashes. It can take a significant amount of time and skill to repair convertibles in accidents, whereas it is generally much quicker and easier to work on sedans or coupes.


Convertibles offer a freeing experience when riding with the top down, but they also require special attention when it comes to safety. Drivers must wear seat belts, make sure children ride in car seats, and keep their eyes on the road at all times. Wind, other weather elements and flying debris pose a greater threat in convertibles than in fixed-roof vehicles.

In a rollover crash, drivers of convertibles are more likely to be ejected from the vehicle than those in conventional cars with stronger roofs, according to research from the Insurance Institute for Highway Safety. Federal rules do not address this issue, but some manufacturers have begun installing roll bars on their convertible models. The stretch fabric and retractable hardtop convertibles exempted by NHTSA’s roof-crush resistance rules can feature these devices, as well as a strengthened frame behind the windshield and A-pillars.

Companies that use convertible bonds should understand the impact that a significant share issuance or below-market conversion will have on their stock price and market for shares. They should also consider the effect on their credit rating if many convert into equity, as it can negatively affect their ability to borrow money. Y Combinator founder Paul Graham has pioneered the SAFE agreement, a form of convertible security that does not have an expiration date and accrues no interest, which can be more favorable for startups.


When you invest in a convertible bond, you start out buying it just like any fixed income security. It pays a set interest rate (coupon) on the par value, typically $1,000, semi-annually until maturity. But unlike a typical bond, it has the option to convert into equity at a certain point in time or during a company’s next round of fundraising.

Companies choose to issue convertibles for many reasons. For example, they may prefer the lower coupon than comparable non-convertible debt, saving them money on interest payments. Or, they may be seeking a way to shift some of their debt into equity to control the balance sheet or for growth purposes. Convertible bonds can also provide call protection, which allows a corporation to switch the convertible from debt to equity at a predetermined future date – even before it has paid out any interest payments.

Due to their structural complexities, convertibles demand active management within asset allocations. As a rule, investment grade convertibles have varying degrees of equity and fixed income sensitivity. For example, during a rising interest rate environment, investment grade convertibles can have greater equity downside exposure than the broader convertible universe. Conversely, when rates are falling, the conversion discount can rise, making them less sensitive to the stock market. Through proprietary modeling and convertible analysis, Calamos is able to monitor and understand these changes so that our investors can be properly positioned for them.