What drives the convertible bond market?

The convertible bond is one of the more venerable instruments still in use in the global capital markets. The basic structure is fairly straightforward and, in this respect, convertibles have remained unchanged since they were developed in the 19th century. They pay buyers below-market fixed income returns, while the attached warrants can be exchanged for equity at the holder’s option. They thus combine features of both equity and fixed income securities, and are often termed ‘hybrid securities’. These instruments present advantages and disadvantages to borrowers and buyers. The borrower can access capital at a lower coupon than would be the case if the lender were to issue plain vanilla debt. It is also essentially raising equity on a deferred basis. This means the dilution of shareholders is postponed.

This whitepaper looks at the key drivers that influence the convertible bond market and how it provides unique opportunities for both investors and issuers. The underlying characteristics of this security make for interesting and complex pricing and valuation dynamic. To make informed decisions and take advantage of investment opportunities requires sophisticated pricing and risk analytics. 

Explore key insights including:

•    What are the key drivers of the convertible bond market
•    Are convertibles difficult to value?
•    What is the right model to use for valuations?
•    The treatment of equity, rates and credit
•    Advanced features of convertibles