A convertible bond is a fixed-income corporate debt security that pays interest and can be converted into a set number of common stock or equity shares. Converting a bond to stock is normally executed during the bond’s life by the bondholder’s discretion. In addition, a convertible bond’s price is particularly sensitive to changes in interest rates. A convertible bond, like a regular bond, has a maturity date and pays interest to investors.
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Furthermore, if an investor does not convert their bonds to equity, they will receive the face value of the bond at maturity. However, if an investor converts the bonds to the company’s shares, the bond will lose its debt characteristics and will only have equity characteristics.
The global convertible bond market is segmented on the basis of type, end user, and region. Based on type, the market is divided into vanilla convertible bonds, mandatory convertibles, and reverse convertibles. On the basis of end user, the market is categorized into retail investors, institutional investors, and others. Geographically, the market is analyzed across several regions such as North America, Europe, Asia-Pacific, and Latin America, Middle East & Africa (LAMEA).
Top Impacting Factors
More flexibility compared to traditional grade bonds, diversified portfolios with capital appreciation, and lucrative long-term return potential with flexible exit options drive the growth of the market. However, a higher risk of losing capital is expected to hamper the growth. Contrarily, digital trade over exchange (ETF) is expected to create profitable opportunities in the coming years.
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Higher Returns Compared to Traditional Investment-Grade Bonds
Convertible bonds have a higher yield, as it involves investing in a portfolio that includes both low-risk government securities and risky equities. In addition, diversification does not protect investors against loss and helps with a decrease of overall portfolio risk and improve the consistency of returns. Generally, convertible bonds have a low rating, however; the return on junk bonds has outperformed the benchmark return. Higher default credit risk and lower ratings are significant drawbacks of the convertible bond market. Therefore, the performance of higher yield bonds compared to traditional grade bonds is a major driver of this market.
Long Term Return Potential with Flexible Exit Option
Convertible bonds generally have shorter maturities with a flexible exit from bonds. Normal bonds are issued for duration of 10 years or less and are typically redeemable after four or five years. In addition, during the economic cycle’s recovery phase, convertible bonds outperformed compared to several other fixed-income investment classes. As a result, long-term return potential with flexible exit option and has a high potential for higher long-term returns with a flexible exit option drives the convertible bond market share.
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Key Benefits of the Report
This study presents an analytical depiction of the convertible bond market forecast along with the current trends and future estimations to determine the imminent investment pockets.
The report presents information related to key drivers, restraints, and opportunities along with a detailed analysis of the market share.
The current market is quantitatively analyzed to highlight the convertible bond market growth scenario.
Porter’s five forces analysis illustrates the potency of buyers & suppliers in the market.
The report provides a detailed convertible bond market analysis depending on the present and future competitive intensity of the market.
COVID-19 Scenario Analysis
In the wake of the COVID-19 situation, the performance of junk bonds has surpassed the benchmark and the returns from high-yield grade bonds increased significantly. In March 2021, the spread of the bond return market increased by nearly 1,000 basis points than traditional bonds.
Furthermore, financial difficulties that businesses face necessitate more market financing, putting strong upward pressure on the bond market and resulting in higher returns than in normal circumstances. Therefore, the global health crisis has a moderate impact on convertible bonds.
Key Market Players:
Northern Trust Corporation., Alcentra, Kames Capital, BlackRock, T.Rowe Price Investment Services, Charles Schwab & Co., AEGON, State Street Corporation, The Vanguard Group, Edward Jones
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