The following quotes are from Mihir Bhattacharya, "Convertible Securities and Their Valuation," Chapter 51 in Frank J. Fabozzi (ed.), The Handbook of Fixed Income Securities: Sixth Edition (New York: McGraw-Hill, 2001)
(Bhattacharya states:
"Increased debt market volatility has driven home the point of duration risk inherent in any security with a fixed income component, including convertibles. The increased volatility of the spreads (over Treasury or other interest rate benchmarks) has heightened investor sensitivity to the reliability of the fixed income floor or bond value of the convertible."
What message is the author is trying to convey to investors?
The author is conveying that investors in convertible debt (or any fixed income security) should not take lightly the value of its straight debt component, i.e., the straight value therefore acts as a floor for the convertible bond price. As long as the firm is solvent, a minimum level of cash flow (as given by the coupon rate) can be relied upon even when volatility in interest rates negatively affects the call option privilege of convertible securities.
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