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- The attractive risk-return characteristics of Convertibles derive from their nonlinear relationships to stock prices and bond prices.
- A convertible security is exchangeable into a fixed number of shares of a common stock. As the underlying common stock price appreciates, the "Conversion Value" provides an effective floor on the price of the convertible, and the convertible price appreciates along with, but at a slower pace than, the common stock.
- A convertible bond includes the promise to repay the principal, together with a fixed coupon return. These fixed income characteristics define an "Investment Value", which provide an effective floor on the convertible price as the common stock price falls. The investment value will fluctuate up or down with the level of interest rates and the credit worthiness of the issuer.
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