What is the limitation of using premium over straight value as a measure of the downside risk of a convertible bond? What is the premium over straight value for a bond if the market price of it is $200, and the straight value is $160? This excerpt comes from an article titled “Bartlett Likes Convertibles” in the October 7, 1991, issue of Bond Week, p. 7:

Bartlett & Co. is selectively looking for opportunities in convertible bonds that are trading cheaply because the equity of the issuer has dropped in value, according to Dale Rainer, director of fixed income at the $800 million Cincinnati-based fund. Rainer said he looks for five-year convertibles trading at yields comparable to straight bonds of companies he believes will rebound.

Discuss this strategy for investing in convertible bonds.

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