In my last piece I discussed the scarcity of investment-grade convertible bonds and those bonds’ tendency to trade at unattractive prices. I cited the bonds of Lam Research—if the stock gains 25% over the next two years, convertible holders will actually lose money, because of the excessive premium at which the bonds currently trade. Even a 50% gain in the stock will only reap convertible holders about a 14% profit, while a 50% stock decline leads to a 13% bond loss. Minimal gain, plenty of downside exposure.
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