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# Convertible Securities

Hybrid convertibles are debentures of one company that are convertible into the common stock of another company. Companies that have accumulated a substantial number of shares of a different organization can issue hybrid convertibles as a way of raising capital. Investors purchasing such issues should not only perform their due diligence to ensure that the debt of the issuing company is attractive, but that the equity and potential gains of the convertible company are appealing, as well.

Another type of combination security is the payment in kind, or PIK. In some respects, PIKs resemble zero-coupon securities in that interest (or dividends in the case of preferred stock PIKs) isn't paid out in cash to the investor in the early years. Instead, it's paid in the form of additional securities of the underlying issue. For bonds, interest paid is in the form of additional bonds; for preferred stock, dividends would be in the form of more preferred shares.

PIKs tend to carry higher coupon rates to entice investors to buy. However, investors should examine the issuing company's financial status very carefully in order to determine the solidity of the organization and whether it's likely to still be solvent in future years. It must be remembered that with higher returns always come higher risks.

SIRENs, or step-up income redeemable equity notes, are convertible bonds that come with two coupons. The first coupon carries a below-market rate of interest. After a few years, the coupon increases to a higher rate that remains in effect until the bond's maturity. SIRENs have a convertible provision that allows holders to convert the notes into the issuer's common stock at a price determined by the issuer. This is known as the conversion price. As is characteristic with other convertibles, if the price of the common stock goes up, the holders stand make a profit. Conversely, if the stock goes down in value, holders of SIRENs are protected with a floor price on their notes, but they will nevertheless earn less than they would on a similar conventional bond.

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