In the October 2020 issue of
Asia Asset Management, we argued against writing off bonds just because yields are in low territory. This is due to bonds having a multi-functional role in capital markets: in the provision of liquidity, preservation of capital, and, indeed, in the supply of income, at least in the case of higher-yielding corporate and convertible bonds.
In this article, we shall focus purely on convertible bonds.
Hybrid security
A convertible bond is a hybrid security. It looks like a plain-vanilla corporate bond, meaning it bears a maturity date, coupon payment, face value and credit risk. However, it also includes an option to convert into a predetermined number of shares of the common stock of the underlying company.