onvertible bonds to provide a higher current yield to investors and equity capital upon conversion. Investors buy convertible bonds to gain a higher current and less downside, since convertible bonds trade its bond value in the case of the common share price. Investors traditionally use the break-even analysis to compare the coupon payment of the convertible to the divided yield of the common shares. Modern techniques of option analysis examine the convertible as a bond with an equity option attached and value it in this manner.Valuing BondsThe value of a bond depends on the size of its coupon payments, the length of time remaining until the bond matures and the current level of interest rates.. The value of the bond is the present value of its cash flows (coupons and principal). Discounted at a suitable interest rate. One convention used to simplify the calculation procedure is to assume a single rate for all cash flows. This is known as yield to maturity.Yield to maturity is a yield that equates the present value of all the cash flows from a bond to the price of a bond. When the price is given the YTM can be calculated. A rise I the YTM will cause the price calculated to decrease, while a fall in the YTM will cause the price to rise. This concludes that that all of the coupons can be reinvested at the same rate. The actual return generated by a bond held until maturity on the future reinvestment rates which the coupon payments are invests.Duration is a measure of the average (cash) term to maturity of a bond. The value of a bond will vary depending on the amount of the cash flows(coupon), timing of the cash flows (term to maturity), and the interest rate used for discounting. Duration helps to summarize these variables in a single number. There are two types of duration, macaulay duration and modified duration.Buying High-Yield BondsThe high-yield bond market is an exciting, growing area of investment. However, before investing in ...
