Alwan, Hadi H.||Kreidle, John R.
M.S. (Master of Science)
Department of Finance
The purpose of this study is to determine if convertible bonds are suitable and worthwhile investments for commercial banks. Most banks do not hold any convertible bonds in their security portfolio although they are allowed to under federal banking regulations. The bankers' lack of interest in convertible bonds appears to be based on the apparent volatility of many of the individual issues. The decision to add a security (or security group) to a portfolio cannot be made by analyzing only that security. The effect on the total portfolio must be considered. Depending on the risk of the security and its correlation with the present portfolio components, its addition may reduce the total risk of the portfolio or the added risk may be nominal for the added possible return. This being the case, the relevant criteria is the expected return, and the risk and correlation of that return, to the return on the other components of the portfolio. The statistics used to quantify the above criteria were the mean annual rate of return, its standard deviation, and the correlation coefficients between the annual rates of return of the various components. The procedure taken in this study was to empirically calculate the above statistics for the eight-year period, January, 1960 to January, 1968, for convertible bonds and the more common bank portfolio components, i.e., short-term, intermediate-term, long-term government bonds, and ten- and twenty-year municipal bonds. The results of these calculations indicate that convertible bonds had a higher rate of return and slightly higher risk than the other securities. The return on convertible bonds was found to be negatively correlated to all but the returns on short-term government securities. The implication of the results is that if convertible bonds are added to a portfolio composed largely of bonds other than short-term government bonds, the total risk of the portfolio would be reduced while the expected return increased.
Balistreri, George A., "An empirical study of the risk and return of the addition of convertible bonds to commercial bank portfolios" (1970). Graduate Research Theses & Dissertations. 1204.
viii, 63 pages
Northern Illinois University
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