But as we go back to old-school convertibles in the nuclear winter of the market, you, the individual investor, are the beneficiary. Here’s just one example: believe me, there are many more out there.

Consider Amerigroup (AGP), a managed health-care company. Its 2% convertible bonds mature in May of 2012, in three and a half years. Recently they were trading around 68% of par value, convertible into stock worth 50%. This computes to a 35% conversion premium, meaning that if you were to buy the convertible at the market price you are paying 35% more for the stock than if you bought the stock directly. It also computes to a 14% yield to maturity, coming mostly from the appreciation from 68 to 100 over the next several years, since you get back 100 at maturity if the company is still solvent and the stock isn’t high enough to make converting worthwhile.

Why would you pay this 35% premium? All kinds of reasons. But the biggest and most obvious is that you can make a lot of money even if the stock goes down, as long as the company doesn’t go bankrupt in the next three and a half years.

The stock is currently $21 and change. Let’s say, for instance, it’s trading at $10 in May 2012. That’s a bit more than a 50% decline over the next three and a half years. What will the convertible bonds be worth in May 2012 if that happens? They’ll be worth 100, or close to 50% more than today’s price of 68. That’s right, a 50% gain (actually more than that over the period when you factor in the annual 2% coupons on the bond) versus a more than 50% loss in the stock.

Ok, what if the stock goes up 50% over the same period? The bonds will be worth the same 100, because it will not ultimately be profitable to turn them into stock unless the stock roughly doubles, or more, from current levels. Incidentally, it should also be clear by now that if the stock is unchanged over the period - a legitimate concern, since one possible outcome of this year’s market crash is an extended time of flat, low stock prices—the bonds will still be worth 100 in May 2012.

Now let’s swing for the fences. Suppose the stock triples over the period (i.e. a 200% return)—certainly a possibility. Since the conversion value of the bonds is 50 now, if the stock triples, the conversion value will go to 150. If you buy the bonds at 68 today and they’re worth 150 at maturity, that represents a gain of better than 120%, even better after adding in the coupons you’ll collect.

So if we rule out bankruptcy, here’s the basic analysis. The stock can be flat, or even lose a lot of value over the next few years, and the bonds can still be a pretty big winner. If the stock makes a big move upward, you’ll participate in a nice chunk of it. But the most important thing is that if you decide the company is going to be viable over the next few years, by buying the convertibles instead of the stock, you are freed from worrying nights about how Mr. Market is feeling. These days, that’s worth a lot.

How has the current world affected these bonds? Well, let’s just go back to the basic analysis we did in decomposing the performance (if you want to call it that) of convertibles this year. We estimated, you’ll recall, that convertibles are down something like $0.15 on the dollar more than a traditional stock hedging strategy would have predicted.

For the Amerigroup bonds, we’ll add back $0.15 on the dollar, then, taking them from 68 to 83 to get a rough sense of where they might be trading if the convertible world as we’d known it hadn’t ended this year. To these eyes that have watched convertibles over the past decade and a half, the profile of the bonds at that price level, roughly 7.75% yield and 65% premium, looks reasonable. That’s not much more than half the yield the bonds now offer (14%), and almost twice the premium. When you buy convertibles, the higher the yield and lower the premium, the more attractive the bonds are.

Here’s a nice closing thought. Even though the best way to look at convertibles is to imagine holding them for the long term, it’s not difficult to envision a scenario much earlier than three and a half years from now in which these bonds will have performed extremely well, both in absolute terms and relative to the underlying stock.