Where Convertibles Fit Within The Investment Landscape
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Date
2024
Authors
Raber, Daniel
Journal Title
Journal ISSN
Volume Title
Publisher
University of Oregon
Abstract
This paper examines both the qualitative and quantitative side of convertible debt. The clash between equity holders and debt holders can cause friction due to differing incentives and convertible debt is a tool to prevent this friction. While equity holders may have a higher risk tolerance due to a return profile, that incentivizes taking on risky projects, debt holders may not invest enough in projects that can grow a company. This qualitative aspect explains how convertible debt can reduce this agency conflict.
Moving forward, this paper examines convertible debt from an investors standpoint to determine whether it should be included in an optimal portfolio. Through this, portfolio optimization is viewed through the Sharpe Ratio, Treynor’s Ratio, and the Markowitz Model. Through the research and data analysis process it is determined that convertible debt fits more with institutional investors rather than retail investors. Furthermore, hybrid securities such as convertible debt can be advantageous for start-ups that may have a difficult time raising capital otherwise.
Description
38 pages
Keywords
Convertible Debt, Portfolio Management, Hybrid Security, Financial Valuation, Capital Structure