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Disadvantages of Convertible Securities
In case of liquidation or bankruptcy of the issuing company, the demand from convertible bondholders for assets is subordinated to the demands of other debt owners of the company.
Convertible securities as any other fixed income security is sensible to changes in the rates of interest. Convertible bonds usually have call provisions and when market interest rates drop, there is an imminent risk the issuing company calls convertible bonds. Then the issuing company will be able to refund convertible bonds with a cheaper debt.
Yields in convertible securities are generally lower than the yields in straight bonds, which is an advantage for corporations that look for a cheaper funding source than issuing straight bonds. If bonds are never converted investors would receive less coupon yields for the rest of the bonds lifetime than they would have received if they would have invested in comparable nonconvertible bonds.
When to buy convertible securities