Analysis Of Investment Strategy Of Convertible Bonds

Convertible bond (CB) is an important catalog in the financial market. It is ansmart way of raising money for corporations and also provided elasticity for thecapital structure. The unique properties exceed equity and debt financing in someparticular environments. All in all, the supply of CB is enormous and increasing.After the bond went publicly traded, its mixed feature of equity and debt madepricing an difficult process. That’s why the analysis of CB investment strategy criticalfor the price discovery functions of the market.The essay firstly explored the papers and theories of Announcement Effect ofissuing CB, and selected56samples of issue plan announcement during2007-2012,to work out the "abnormal return" with Event Study method. It turned out CB is notwelcome in the equity market, a significant abnormal return of-1.15%was found onthe very day but none else. Secondly, the essay applied the Profit Dividing Principle,along with the features of CB, designed one kind of derivative similar as GradingFund, and then analyzed the trend of its net value and investment opportunity.The main achievement of this essay is that it confirmed the negative effect of CBissuing for the equity market, and provided an incentive for mutual funds to adjusttheir position in the related stock. And the structured product based on CB connectsmultiply financial sub-markets, and helped with the value discovery function of themarket.