[1] The complex valuation issue may attract specialized professional investors, including arbitrageurs and hedge funds who try to exploit disparities in the relationship between the price of the convertible security and the underlying common stock.
The minimum price at which a convertible bond will trade is based on its fixed income characteristics: the stream of coupon payments and eventual maturity at par value.
[8] Convertible bonds generally provide a higher current yield than common stock due to their fixed income features and superior claim to the assets of the company in the event of default.
Alternatively, the value of the common stock could fall, but in that case the convertible's price will decline only to the point where it provides an acceptable return as a bond equivalent.
Convertibles typically have a lower yield than a nonconvertible, because the investor is receiving an additional right: that of conversion to the underlying stock.