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Other Fixed Income Investments

By David Luhman on Mon, 05/11/2009 - 23:18

Other Fixed Income Investments

Are convertible bonds attractive?

Who should not invest in preferred stocks (and who should!)?

Are convertible bonds attractive?

Convertible bonds can be converted from a bond to a stock

Convert the bond into stock if the stock rises

Because of the ability to convert the bond into stock at a potentially favorable price, convertible bonds yield less than comparable straight debt

Convertible bonds are a good hybrid security that may have a place in a diversified portfolio

But the convertible bond market is relatively small and requires detailed analysis

Use mutual funds if you want to invest in convertibles

Don't feel that you're missing much if you aren't invested in convertible bonds

Who should not invest in preferred stocks (and who should!)?

There are many different forms of preferred stock

The most common type is similar to a bond

The preferred stock offers a constant payment called a dividend rather than an interest payment

The preferred stock dividend is not tax deductible to the issuing corporation as interest expense

Preferred stockholders have a higher claim on corporate assets than common stockholder in case of bankruptcy

Preferred stock is generally attractive to coporations, and not to individual investors

Corporations can exclude 70 to 80 percent of the preferred stock dividend from taxable income

Individuals do not enjoy this dividend exclusion

Because of this exclusion, corporations are willing to accept lower yields than individuals would accept

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