The convertible bond is a little known hybrid investment instrument that offers investors the upside potential of a stock with the downside protection of a bond. When John P. Calamos, Sr. was in the Air Force in the 1970s — a difficult time for the financial markets — he became intrigued with how convertible bonds could be used to help preserve principal and make money for investors. A pioneer in investment management, he applied option price theory to the valuation of convertible bonds first for institutional investors. Encouraged by his success with institutions as clients, Calamos then made the strategy available to individual investors in 1985 through one of the first-ever convertible mutual funds, Calamos Convertible Fund.
In addition to managing a multibillion-dollar investment management company that today offers an array of global investment opportunities, Calamos has shared his expertise in two books: Convertible Securities: The Latest Instruments, Portfolio Strategies, and Valuation Analysis (1998) and Investing in Convertible Securities: Your Complete Guide to the Risks and Reward (1988).
The following pages are excerpted from the second chapter of Convertible Securities: The Latest Instruments, Portfolio Strategies, and Valuation Analysis.