The correct answer is      (A.) Convertible bonds

Convertible bonds issued within the last six months are up a remarkable +46% for the year through mid-April. They've handily trounced stocks in the S&P 500, logging total returns of +2.8% versus -11% for the first quarter of the year. And further out on the risk spectrum, more speculative-grade convertibles enjoyed returns of nearly +12%.

But the best news is convertibles are still dirt cheap, despite the strong showing. Convertibles, or converts, are bonds or preferred stock that convert into shares of the underlying stock plus pay you while you wait to convert. They come in a variety of flavors, but most offer a predictable income stream and an equity kicker, which is like a call option on the underlying stock.

These bond/stock combos are perfect fare for today's uncertain markets -- the bond portion keeps the price steady while the equity kicker lets you play the coming stock market rebound. Best of all, you don't have to exercise your conversion privilege to enjoy their benefits. Studies by Merrill Lynch, Calamos, Bank of America, and others have found that converts tend to enjoy more than half the gains when the company's common shares rise but fall less than half as much on the way down.

Converts also allow you to hedge your bets with a strategy of convertible arbitrage. Since converts typically move in the direction of the underlying stock, you can hedge your position by holding the convert long and selling short the underlying stock. That way, if the stock price falls, the loss on the convert should be offset by the gain on the short stock position. Or, if the stock price rises, the corresponding uptick in the convert should offset the loss on the short stock position. Still, for the arbitrage to work, the convert and the underlying stock must move in the same direction at the same rate, and that doesn't always happen. For example, if the stock rallies sharply and the convert doesn't, profits on the convert may not offset losses on the short stock position.

Convertibles trade as bonds or preferred stock. Bonds are higher up on the food chain, so their payments are more secure, but preferred stock trades on a major stock exchange so can be easily bought and sold.

There are two primary types of convertibles. Non-mandatory (sometimes called vanilla) convertibles give you the option but not the obligation to convert into a fixed amount of common shares at any time. In contrast, if you hold mandatory convertibles you can convert any time but you can't sit on your hands forever. But there are lots of other bells and whistles and no shortage of investment choices. You can buy individual convertible bonds or preferred stock, cover the entire market in one fell swoop with an ETF, or capture double-digit yields from some dozen closed-end funds that generally use leverage to juice returns.

So how do you know what to do? Simple. Check out StreetAuthority editor Carla Pasternak's newsletter, High-Yield Investing, to learn more about converts that appeal to investors at each end of the risk spectrum. In the latest issue, Carla takes an in-depth look at the convertible bond market and profiles two issues that offer hefty yields (around 8%!) and steady share price performance. To learn the names of these bonds, and to learn more about High-Yield Investing, please visit this link.