The Effect of Embedded Options on the Financial Performance of Convertible Bond Funds

John Kihn

Financial Analysts Journal, 1996, vol. 52, issue 1, 15-26

Abstract: This study is the first to analyze the pricing of convertible bonds by examining the financial performance of open-end convertible bond funds. The findings indicate that (1) in general, convertible bonds did not outperform straight low-grade corporate bonds during the study period, January 1962 through September 1994; (2) convertible bonds are significantly more equitylike and significantly less bondlike than low-grade bonds; and (3) convertible bonds display a strong January effect. The results suggest that the equity call option embedded in convertible bonds was appropriately priced during the study period.

Date: 1996
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DOI: 10.2469/faj.v52.n1.1962

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