In recent years, the size of the convertible bond market has shrunk as rates dropped and the cost of issuing debt over hybrid securities declined. Nevertheless, convertibles can be an intriguing portion of the market when available.
A convertible bond is a hybrid security, with blended characteristics of fixed income and equity securities. The convertibles market is relatively small, making participation among individual investors difficult and pricing dynamics less attractive. These securities in their most basic form offer more risk/return potential, though understanding the sector can be complex. During low rate environments with high equity valuations, many financial advisors receive questions about convertibles. This piece can educate clients.