The authors are geared toward a broad audience. Amateur investors can apply the essential financial theory presented as background to activities well beyond the confines of the convertible bond market. At the identical time, the book presents quantitatively sophisticated valuation methods and trading strategies, using terms that will likely be latest even to many experienced practitioners – for instance “ASCOTs”, “Zomma”, “Nuking” and “Happy Meal”. ”
It is the reader’s responsibility to all the time concentrate to the fastidiously considered formulations of the authors. In his foreword, Advent founder Tracy Maitland recalls his entry into the financial markets within the Eighties and mentions “long-term returns from convertible bonds that matched the returns of common stocks, but with significantly less risk.” To update the story within the predominant text To summarize, the authors note that “convertible bonds have historically returned as much as common stocks over the long term.” To avoid exaggeration, they write elsewhere: “Convertible bonds offer less volatility than stocks.” Equally prudent this comment: “The record of convertible bond indices matching stock index returns over the decades reflects the superior growth of convertible bond issuers compared to the growth of the companies included in the stock indices” (italics added in previous sentences ). One message that comes across clearly is the asymmetrical behavior of convertible bonds, which absorb much of the upside potential of the associated stocks while cushioning the downside potential through the bond side of their nature.
Among the numerous useful observations that stand on the sidelines of the predominant theme, two require somewhat remark. First, the authors note that “longer-term securities tend to have wider credit spreads than shorter-term securities because risk increases over time.” Records from ICE Indices, LLC confirm that the option-adjusted spread (OAS) for 10- to 15-year U.S -Investment grade corporate bonds have consistently outperformed the OAS for 3- to 5-year corporate bonds except from December 2007 to March 2009. However, for top yield bonds, the 3- to 5-year OAS typically exceeds the 10- to 15-year OAS.
Secondly, the authors note that “companies that have the ability to print money are considered completely risk-free because they can, under any circumstances, repay their debts with a currency that they can create on their own.” In fact, control is one Currency is a crucial but not sufficient condition for there being no risk of default. History documents numerous government defaults on debts denominated within the local currency, corresponding to Russia’s default on its ruble debt in 1998. In this context, additionally it is value remembering that the US Treasury only has an AA+ rating with Standard & Poor’s. rating, doesn’t have the agency’s highest rating (AAA).
“Busted” (out of the cash) convertible bonds are one other time-honored topic in fixed income circles. Some bond sellers argue that these issues will inevitably be neglected once they are not any longer attractive to convertible bond investors, turning them into bargains with yields higher than the yields of comparable fixed (non-convertible) bonds. Maitland, Nelson, and Partlow are careful to state that convertible bonds valued at a reduction to par simply “significantly outperform non-convertible bonds” (italics added).
As with most books, some minor issues will should be addressed in a future edition. The book refers back to the ICE BofA US High Yield Corporate Index by its former name, the “High Yield Master II Index.” Further editorial excerpts mention the BlackRock fund “Alladin”, the “Capital Assets Pricing Model” and the “Discounted Dividend Model”.
These stylistic quibbles don’t detract from the numerous pleasures that readers have come to expect from. One would not expect to find the Latin forerunner of Shakespeare’s saying, “It’s Greek to me,” in a lengthy book about finance. Similarly coincidental is a Talmudic commentary on the symbolism of the Hebrew equivalents of the Greek letters Gamma and Delta. Most necessary, nonetheless, are the unique research contributions that enrich coverage of each aspect of the convertible ecosystem. Jamie Dinan, CEO of York Capital Management, rightly calls it a “remarkably comprehensive book”.
Full disclosure: The reviewer is credited within the acknowledgments for this book and in an endnote.
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