Convertible bonds' hybrid vigor.

• Author: Cohen, Jeff
• Position: Money Matters

Question: What investment instruments are like a car?

Answer: Convertible bonds. You get the thrill of riding top-down through the volatile stock market while knowing you've got security in case of a change of climate.

There are always investors who want it both ways: They relish facing big risks and earning bigger rewards in the stock market, but at the same time they long for the Cadillac comfort of bonds.

These investors can hedge their bets through convertible bonds, which offer some protection from sudden dips in equity values but still allow investors to hitch their wagons to a bull market.

Because the bonds can be converted into a fixed number of common shares at any time, they increase in value as the issuer's stock rises. When the price drops, so does the value of the bond, but the fixed coupon continues to provide a steady income.

Convertibles have been burning up the track recently. According to the Value Line Convertible Index, the securities have racked up impressive average total returns of 28.2% in 1991 and 11.3% in the first half of 1992. These strong gains are largely the result of conditions favoring both the stock and bond components of convertibles: a rising equity market and sharply falling interest rates.

Convertibles also offer advantages for companies seeking capital, which is why some of the state's largest corporations have brought offerings to market in the past several years, including a quartet of Greensboro-based companies: Fieldcrest Cannon with a $110 million issue, Guilford Mills with a $75 million issue, Oakwood Homes with two issues totaling $53 million and, this year, Unifi with a $200 million offering. Asheville-based Ingles Markets has issued $50 million in convertibles. Among the attractions: Interest paid out on bonds is tax-deductible to corporations, unlike dividends paid on stock, and because of the conversion feature, coupons are lower than on conventional bonds.

On Interstate/Johnson Lane's buy list in August was the Guilford Mills issue. Offered in March 1987 with a maturity date of 2012, each $1,000 bond is convertible to 33.7 shares of common stock, at a value of $29.65 a share. At the time of the bond offering, Guilford stock stood at $23.70 a share, so convertible investors were paying a 25% premium. (Figures are adjusted for a three-for-two stock split in January.)

The stock has fluctuated widely since 1987. But swings in the convertible haven't been as dramatic, and holders have earned an...