convertible securities and their investment

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1、CHAPTERFIFTY-NINECONVERTIBLESECURITIESANDTHEIRINVESTMENTCHARACTERISTICSCHRISP.DIALYNASManagingDirectorPacificInvestmentManagementCompanyJOHNC.RITCHIE,JR.,PH.D.ProfessorofFinanceTempleUniversityConvertiblesecuritiesarefixedincomesecuritiesthatpermittheholdertherighttoexchangethatsecurit

2、yforthecommonstockoftheissuingcorporationunderprespecifiedconditions.Thetermsatwhichthedebtsecuritycanbeexchangedfortheissuer’scommonstockaresetforthinthesecurity’sindenture.Theoptiontoconvertissolelyatthediscretionofthedebtholderandwillonlybeexercisediftheholderfindssuchanexchangedesi

3、rable.Mandatoryconvertiblesecuritiesareanexception;conversiontoequityisrequired.Convertiblesecuritiestypicallycontainotherembeddedoptions.Themostcommonisanoptionprovidingtheissuertherighttocalltheissueatitsdiscretioninaccordancewiththetermssetforthintheindenture.Manyconvertiblesecuri

4、-tiesalsocontain“put”provisions,whichenabletheholdertoredeemthebondpriortomaturity.Becauseofthemultipleembeddedoptionsinaconvertiblesecu-rity,thevaluationofthesesecuritiesisnotasimpletask.Valuationmethodsforconvertiblesecuritieshaveadvancedsignificantlyinrecentyearswiththedevel-opment

5、ofoptionpricingtheoryforbothequityoptionsandinterest-rateoptionsandwiththetremendousadvancesincomputertechnology.Evenso,thevaluationofconvertiblesecuritiesremainsverycomplex.Inthischapterthefundamentalcharacteristicsofconvertiblesecurities,theconvertibleuniverse,riskandreturncharacte

6、ristics,andthebasicprinciplesofhowconvertiblescanbevaluedaredescribed.TheauthorswishtothankYuriGarbuzovofPIMCOandSandraHarrisforconsiderabletechnicalassistance.1371Copyright©2005,2001,1997,1995,1991,1987,1983byTheMcGraw-HillCompanies,Inc.Clickherefortermsofuse.1372PART8ConvertibleSec

7、uritiesGENERALCHARACTERISTICSOFCONVERTIBLESConvertiblebondsareoftensubordinateddebentures.Conceptually,thismeansthattheclaimsof“senior”creditorsmustbesettledinfullbeforeanypaymentwillbemadetoholdersofsubordinateddebenturesintheeventofinsolvencyorbank-ruptcy.Seniorcreditorstypicallyin

8、cludeholders