Someone gave you the wrong information on these, so I'm chiming in. Specifically, I'll use the Tesla 2024 convertibles as an example since this is what I bought. I'll also assume Tesla SP is $190 for the calculations. I'm new to corporate convertible bonds, but not totally new to convertible debt.
CUSIP 88160RAG6
Bonds Detail
The bond component of a convertible is like a normal bond, where it pays interest and pays back the face value at maturity. In the case of 88160RAG6, they're trading just below $90 for $100 face value and pay 2% a year. This means you get paid simple interest of $10 for 5 years plus $10 profit from trading below $100, which is $20 / $90 / 5 = 4.4%.
The bonds also have an option (but not required) to convert to Tesla shares at a minimum ratio of 3.22 per $1000 of bonds. The conversion price is therefore ~$310 a share or lower. You would only convert if the current SP is above the conversion price of course to net an immediate profit.
If Telsa SP is $500 in 2024, you'll make (500 - 310) = $190 / share = $59 / bond. Add the $20 from interest and discounted price today for a profit of $79 per bond, or 87% profit after 5 years.
Doing similar math for convertibles and summarizing 5 years out:
If Tesla SP is $10, profit is 22%
If Tesla SP is $95, profit is 22%
If Tesla SP is $190, profit is 22%
If Tesla SP is $310, profit is 22%
If Tesla SP is $500, profit is 87%
If Tesla SP is $1000, profit is 260%
If Tesla SP is $4000, profit is 1294%
Compare this to to buying shares.
If Tesla SP is $10, profit is -95%
If Tesla SP is $95, profit is -50%
If Tesla SP is $190, profit is 0%
If Tesla SP is $310, profit is 63%
If Tesla SP is $4000, profit is 2000%
I look at it this way, but this is solely my opinion.
1. I'm buying Tesla because it may go up 5x or 10x. If it only goes up 10% annually, I might as well invest in bonds or more conservative stocks. The convertibles ensure a profit except in the most unlikely case (bankruptcy AND assets can't cover debt). Even so, I should get a good chunk back in the worst case.
2. Although convertibles with TSLA SP $4000 nets 1/3 less than buying stock outright, the additional security and profit lets me invest more than double what I would with stocks. In the big win scenario, I'm ahead. And in the lose scenario, I'm ahead.
Some other pluses for convertibles:
1. There's cases where the conversion ratio increases (share price is cheaper) if Tesla has a change of control (bought out) for around $250 and higher. This adds extra profit in the event things don't work out.
2. Conversion is possible anytime if SP stays above ~30% + conversion price for awhile.
3. Bond holders may even come out whole or mostly whole in the event of bankruptcy, assuming Tesla assets are worth a decent amount.
4. Convertible bonds can be sold and bought like stocks, but goes down about half the rate of TSLA stock when it falls.
Disadvantages:
1. The spread for convertibles ranges from 1-4 points, so it's much higher than stocks, but generally better than options.