What are Convertible Bonds?

Convertibles are a truly unique asset class that is often overlooked by both equity and bond investors. They share many common characteristics with traditional fixed income instruments, including a maturity date, principal repayment at maturity, a fixed coupon payment, and a credit rating.  As their name implies, convertibles also include an “option” to convert the bond into the common stock of the underlying company. This combination of fixed income and equity-like characteristics can provide an attractive risk/reward profile for investors.

Investors in convertible securities, barring default, can benefit from a steady income stream and the repayment of principal at maturity, while retaining the option to share in potentially higher equity values. The bond-like characteristics of convertibles provide downside price support, while the embedded equity option provides upside potential.  In consideration of this upside potential, investors receive a lower coupon payment on the principal amount of the bond. Therefore, the price behavior of a convertible bond is influenced by both the fixed income value and the common stock price (Chart 1).

PIMCO's Convertible Experience

Applications for Convertibles

Investment Philosophy for Convertibles

Sources of Value‑Added

Risk Management / Controls

Composition of the Convertible Market

How To Invest

Related Strategies

Fixed Income

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Disclosures

Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk. Convertible securities may be called before intended, which may have an adverse effect on investment objectives. PIMCO strategies utilize derivatives which may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose mo more than the amount invested. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio. There is no guarantee that this investment strategy will work under all market conditions and each investor should evaluate their ability to invest for a long-term especially during periods of downturn in the market. Diversification does not ensure against loss.

This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.