Part I: How Do Convertible Bonds Work?

The Asian credit market has recently seen a surge in convertible bond issuance, accompanied by strong double-digit returns year-to-date. This trend has drawn attention from both institutional and retail investors. But what exactly are convertible bonds, and why are they gaining traction?

In this first part of series, we break down the fundamentals of convertible bonds—a hybrid investment that blends the characteristics of both bonds and stocks. Our aim is to make this asset class more  understandable for everyday investors.

Asian convertible bonds have delivered impressive year-to-date performance, amid favorable market conditions, attracting strong investor interests. In 2025, convertible bond issuance has tripled compared to the average from 2020 to 2024, indicating growing demand from companies seeking flexible financing and investors looking for balanced risk-reward opportunities. 

Nomalised with 9/30/2011 = 100

Source: Bloomberg, as of 30 September 2025. Reference index: Bloomberg APAC ex Jpn Convertibles Composite Total Return Unhedged USD

Source: Bloomberg, as of 27 October 2025

Convertible bonds are hybrid instruments that combine features of both debt and equity. They are issued by companies to raise capital and typically offer fixed interest payments and a maturity date—just like traditional bonds. What sets them apart is the embedded option that allows investors to convert the bond into a predetermined number of shares of the issuing company. This conversion feature introduces equity-like upside potential to an otherwise fixed-income security.

Convertible bonds share several traits with plain vanilla bonds: they have a fixed maturity date, regular coupon payments, and an issuer obligation to repay principal. However, the key difference lies in the conversion option. This feature allows bondholders to convert their holdings into equity at a set price, offering the potential to benefit from rising share prices.

Because of this equity-linked upside, convertible bonds typically offer lower yields than comparable bullet bonds. Yet, during periods of market softness, convertibles may trade at more attractive valuations. This is because equity-sensitive investors may reduce exposure, creating opportunities for fixed income investors to capture higher yields relative to traditional bonds.

For equity-focused investors, convertible bonds offer a more conservative way to gain exposure to stock markets. Each bond includes a conversion priceⁱ, which represents the effective price per share at which the bond can be exchanged for equity.

If the company’s stock rises above this price, the investor can convert the bond and benefit from the upside. If the stock underperforms, the bondholder can simply hold the bond, continue receiving interest, and get their principal back at maturity—preserving capital.

This dual nature—participating in equity upside while protecting against downside—makes convertible bonds an attractive alternative to direct equity investments, especially in volatile markets.

Convertible bonds offer a balanced investment profile: income generation through coupons, capital preservation in down markets, and growth potential via equity conversion.

Their valuation is influenced by both fixed inputs (like maturity and conversion price) and market-driven factors (such as stock performance and interest rate movements). Strategically allocating to convertibles during equity bull markets can enhance returns within a fixed income portfolio.

Importantly, convertible bonds are not just for sophisticated investors. Retail investors can also benefit from their risk-adjusted return potential, especially when seeking to diversify income portfolios with a growth tilt.

Convertible bonds represent a compelling middle ground between bonds and stocks. As more Asian companies tap into this flexible financing method, and as investors look for smarter ways to navigate market cycles, we believe convertible bonds will continue to play a valuable role in portfolio construction.

Coming Up in Part II: We’ll share insights into how we identify convertible bond opportunities across different market environments.

ⁱ Conversion Price = Par Value / Conversion Ratio. Conversion price represents the effective price per share at which the bond converts into equity. This is calculated by dividing the bond’s par value (typically USD 1,000) by its conversion ratio, which is the number of shares the bondholder receives upon conversion. For investors, the conversion price represents the cost of acquiring equity through the bond.