k , because of high levels of debt and variable revenues and earnings are called “below investment grade” or “ junk bonds” because of their speculative nature. Higher quality bonds are considered investment grade.Inflation-Linked BondsAn inflation-linked bond is a bond that provides protection against inflation. Most inflation-linked bonds, the Canadian “Real Return Bond”, the British “Inflation-linked Gilt”, and the new US Treasury “inflation-protected security” are principal indexed. This means their principle is increased by the change in inflation over a period of time. I most countries, the Consumer Price Index is used as an inflation proxy. As the principal amount increases with inflation, the interest rate is applied to this increased amount. This causes the interest payment to increase over a period of time. At maturity, the principal is repaid at the inflated amount. In this fashion, an investor has complete inflation protection, as long as the investor’s inflation rate equals the Consumer Price Index. Convertible BondsA convertible bond is a bond that gives the holder the right to convert or exchange the par amount of the bond for common shares of the issuer at some fixed ratio during a particular period. As bonds, they have some characteristics of fixed income securities. Their conversion feature also gives them features of equity securities.The exchange feature of a convertible bond gives the right for the holder to convert the par amount of the bond for common shares a specified price or conversion ratio. For example, a conversion ratio might give the holder the right to convert $100 par amount of the convertible bonds of IBM Corporation in its common shares at $25 per share. This conversion ratio would be four to one.Bond issuers sell convertible bonds to provide a higher current yield to investors and equity capital upon conversion. Investors could sell c...
