Why do convertible bonds typically offer lower interest rates than traditional bonds?

Convertible bonds typically offer lower interest rates than traditional bonds primarily because they come with the added benefit of being convertible into equity. This conversion feature gives investors the opportunity to participate in the equity upside of the issuing company. When an investor purchases a convertible bond, they are not only receiving interest payments but also have the potential to convert their bond into shares of the company's stock at a set conversion rate.

This added equity upside makes the bonds attractive to investors, allowing the issuing company to offer a lower interest rate since the value of the convertible feature offsets some of the risk associated with lending money through traditional bonds. Consequently, investors may accept lower yields in exchange for the possibility of future gains if the company’s stock performs well.

This aspect of convertible bonds significantly influences their interest rate, making them a compelling investment choice for those looking to balance fixed income with potential equity growth.