In horticultural terms, convertible bonds are the rare orchids of the capital markets, requiring a finely balanced combination of share prices, interest rates and macro-economic environment, which in recent times have combined to create a hothouse atmosphere for the asset class. The key in making convertibles work is volatility in the equity markets, which is used to price the bond's option to convert into shares. The coupon the issuer pays is inversely correlated with the option price and other factors, including the liquidity and repo potential of the underlying stock. As shares hovered near record lows following the financial crisis, the convertible market went into the cold store. Now, as stock markets rally, it is booming.
展开▼
