As a rule, bonds are convertible into stock. One of the best illustrations is an issue of bonds of the American Agricultural Chemical Co. They are convertible into the stock of the company at par and bear 5% interest. The stock of the company pays dividends in excess of the interest upon the bonds, and is quoted at a price above par. The result is, that the bonds, which, in themselves, would probably not be selling even at par, were it not for the convertible feature, follow closely the price of the stock.
It does not necessarily follow, however, that if the price of a stock into which a bond is convertible, falls below its conversion price, that the quotations of the latter will be sympathetically affected. For, its market value then would depend entirely upon its investment value as a bond. The only influence which the convertible privilege has upon a security is to carry it above its intrinsic investment value when the security into which it is convertible advances beyond the "conversion parity."
The attractive feature about " convertible bonds" is that they are considered safer than the stock, and when, at the time of issue, the stock is not selling above its conversion price. The purchaser of the bonds, therefore, feels reasonably secure of his money. But in case the stock should advance in price beyond the conversion equality, he might . reap a profit from the convertible privilege; in other words, he probably has nothing to lose, and, possibly, much to gain. It is the lottery or speculative feature which gives such investments their popularity. This plan of financiering caters to the speculative spirit and is scarcely a high-class method. In case the stock is "converted " the annual interest charge becomes contingent instead of fixed.