Convertible bonds are an important asset class, but its risk and return performance and suitability as an asset class for different types of investors has received insufficient attention. We attempt to rectify this neglect by evaluating the unique characteristics of convertibles and documenting the convertible bond market in terms of its historical return performance. We find that convertibles allow the investor to experience the benefits from both a fixed-income and equity investment, have favorable features for issuers who are consequently motivated to price the bonds attractively, and are ideally suited for an investment in firms whose future risk is difficult to assess.
Investors regard asset characteristics as positive or negative costs, and investors evaluate expected returns net of these costs. The New Equilibrium Theory (NET) framework applies to all assets-including stocks and bonds, real estate, venture capital, durables and intangibles such as human capital-and incorporates all asset characteristics.
An examination of the returns on equities, domestic bonds and crossborder bonds of the U.S. and 17 foreign countries over the 21-year period 1960-80 indicates that foreign stocks and bonds generally outperformed U.S. securities, although the U.S. was the outstanding performer in some periods. International investors may expect gains from diversification. In addition, any imperfections in international capital markets may allow them additional profit opportunities. The data presented here suggest that the economic relationships often posited between international stock and bond expected returns, inflation and ex- change rates hold only imperfectly. Deviations from the international parity theorems occur often, especially over short periods of time.
The authors present both annual index levels and total rates of return for common stocks, long-term government bonds, long-term corporate bonds, Treasury bills, and the Consumer Price Index over the period 1926-78. The authors also provide historical return figures for four component series - the riskless rate of interest, the equity risk premium, the bond default premium and the maturity premium between the return on long-term governments and Treasury bills. Taken together, the five basic asset series and the four component series provide the investor with the necessary historical background for making judgments about future tradeoffs between risk and reward