Convertible bonds give a holder an option to exchange a bond for a predetermined number of shares in an issuing company. When first issued, they act like regular corporate bonds with a slightly lower interest rate. Convertibles can be changed into a stock, and thus, benefit from a rise in the price of the underlying stock. Therefore, companies offer lower yields on convertibles. If the stock performs poorly, there is no conversion and an investor is stuck with the bond's sub-par return. A Conversion Ratio in convertibles determines the number of shares that can be converted from each bond. Moreover, the issuing company has the right to call the bonds, which is called a forced conversion of bonds. The forced conversion usually takes place when the price of the stock gets higher than the amount it would be if the bond was redeemed or at its call date.

The conversion takes place when an owner of a bond, with an example ratio 50:1 (with the price of one thousand dollars per one), wants to exchange it for fifty shares of the stock. Typically, firms issue convertible bonds, since they offer a lower interest cost and less restrictive covenants than a nonconvertible bond, but in this case an issuer will be confronted with a capital structure uncertainty. What is more, the bond price rises when the stock price approaches the conversion price so that your convertible performs similarly to a stock option at this point. As the stock price moves up or becomes extremely volatile, so does your bond.

Municipal convertible bonds, like any other convertible bond, are issued by municipal organizations. The municipal convertible can be converted into the equity using a predetermined exchange ratio. This way the existing shares are diluted by the creation of new shares. The option to convert is solely at the discretion of a bond holder, who will do so only if it is beneficial.

Municipal convertible bonds are often subordinated debentures, and due to this, bond rating agencies have usually rated convertibles one class below that of a straight debenture. As far as, typically, issuing municipal convertibles do not affect a company's rating, it is a way out for municipal organizations. The municipal convertible is also an option for an investor, as in return for a reduced yield, an investor gets a security with a considerable upside potential along with a downside protection. That is where a MSRB appears to be useful.

The Municipal Securities Rulemaking Board (MSRB) is a regulating body that creates rules and policies for investment firms and banks in the issuing and sale of municipal bonds, notes and other municipal securities by states, cities and counties. Activities, regulated by the MSRB, include the underwriting, trading and selling of municipal securities financing public projects. Established by the United States Congress in 1975, the MSRB is a self-regulatory organization that is subject to supervision by the Securities and Exchange Commission (SEC).

You can also deal with municipal securities as interest-paying debt securities that state and municipal governments issue to finance operating expenditures, to fund certain tax-exempt entities, comprising colleges and nonprofit hospitals, and to provide funds to firms and individuals. The tax-exempt status of munis not only relieves buyers from paying a tax on the interest income, but also allows government issuers to borrow at favorable rates.

Hence, if you are the one, who wants to participate in the stock market without a feeling of taking wild risks, the municipal convertible investment is the thing you might need. The convertible trades like a bond, effectively putting a price floor under the investment of yours, the municipal securities will manage certain tax-exempt ways and manage an additional protection of your investment.