The bond's interest payments are typically higher than the dividends paid on the common stock, although the interest rate is usually lower than that on nonconvertible bonds. However, the ability to convert to common shares allows investors to participate in share price increases without as much exposure to share price decreases. Convertibles do not decline as much as the common shares because the bond retains a market value equal to comparable bonds paying the same yield, which acts as a floor for the convertible's value.

When issued, the convertible bond's value exceeds the common stock's price by an amount known as the conversion premium, which changes as the stock price changes. If the stock is selling below the conversion equivalent, there is no financial incentive to convert the bond, so its price will be primarily determined by factors affecting bonds. Once the stock's price rises enough to provide a profit by converting the bond, the stock's value will significantly affect the convertible's market value.

Most convertibles can be called back by the issuer at a specific price. These call provisions are typically used by the issuer to force investors to convert the bond to common stock so the debt obligation can be eliminated.

Since they are a hybrid investment, convertible bonds can be difficult investments to evaluate. You should only invest in a convertible if you like the underlying stock. Consider bond and stock pricing, current interest rates, the probability of a bond call, the convertible's yield advantage over common stock, the convertible's fixed-income value, and the volatility of the underlying stock.