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

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  • John Kihn

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.

Suggested Citation

  • John Kihn, 1996. "The Effect of Embedded Options on the Financial Performance of Convertible Bond Funds," Financial Analysts Journal, Taylor & Francis Journals, vol. 52(1), pages 15-26, January.
    • Handle: RePEc:taf:ufajxx:v:52:y:1996:i:1:p:15-26
    DOI: 10.2469/faj.v52.n1.1962
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