The convertible bond funds you buy can be just as exciting as stock funds!

Professional investors, when planning an investment portfolio, will generally allocate some bond funds as a baseline to balance the portfolio’s volatility. In the way funds are categorized across various platforms and banks, not all bond funds are suitable as risk-smoothing products. The most special one is convertible bond funds. Even though the name contains the character “bond,” the level of volatility is not smaller than that of stock funds.

Convertible bonds are a rules-constrained “debt + equity” hybrid

Convertible bonds have the full name convertible corporate bonds. In essence, they are a special type of bond issued by listed companies. Simply put, they are proof that a company borrows money from investors, with a specified repayment term and interest payments; at maturity, the company repays investors the principal and pays the interest. But the biggest difference from ordinary bonds is that convertible bonds grant investors a special right: within the agreed conversion period, investors can convert the bonds they hold into the issuer’s company stock. This is also where the name “convertible” comes from.

To truly understand convertible bonds, you first need to clarify several key terms. Face value is the denomination of this promissory note, usually 100 yuan—this is also the initial price when it is issued. Second is the coupon rate: the interest rate on convertible bonds is not the same every year. Generally, the first year is particularly low, and then it increases year by year; the interest is paid once per year. Third is the conversion price, which is the most core number for convertible bonds—it determines at what per-share price you can convert the bond into stock in the future. Fourth is the stock price of the underlying shares, i.e., the actual trading price of this company’s stock in the stock market. Fifth is the market price, which is the trading price of the convertible bond itself in the market; this price will move up and down with the underlying share price and market expectations.

Beyond these basic terms, there are several key rules constraints for convertible bonds. The first is mandatory redemption: if the company’s underlying stock price is higher than the conversion price by 30% on 15 out of 30 trading days, the company has the right to forcibly redeem the convertible bond at a price of current interest + principal. This redemption price is far lower than the convertible bond’s prevailing market price at that time. The company does this with the purpose of forcing investors either to convert; if investors don’t act in time, they will be redeemed at a low price, losing the chance for high returns.

The conversion price downward adjustment rule means: if within any 30 trading days the company’s underlying stock price is below 80% of the conversion price on 20 days, the company may lower the conversion price. This is like the company “sharing gains” with investors—lowering the conversion threshold so that when the underlying stock price is relatively low, investors can still benefit from converting. This encourages investors to convert and reduces the company’s own burden of repaying debt. However, lowering the conversion price means that with the same face value, the convertible bond converts into more shares—diluting earnings per share, net assets per share, and dividends per share—which is not favorable for the stock price to perform well over the long term.

There is also a put right (redemption right), which is effectively a “safety cushion” for investors. In the last two years of the convertible bond’s issuance period, if the underlying stock price is below 60% of the conversion price for 30 consecutive trading days, investors have the right to require the company to repay principal and interest early—so they can recover principal and interest in time and avoid further losses. But in practice, most listed companies avoid triggering the redemption clause by lowering the conversion price in advance, because repaying debt early would put significant capital pressure on the company.

The core structure of convertible bonds is one bond plus a stock call option—at least in theory, it is a product that lets you be aggressive when you want and defensive when you need to.

Convertible bond “equity-like” behavior overwhelms the “bond-like” nature

In theory, sure. But when you look at the real market, you’ll find that convertible bonds are far from that story. Their equity-like behavior is much more ferocious than their bond-like behavior.

Let’s look at the situation of the Shangyin Convertible Bond (Shanghai Bank convertible bond). Its face value is 100 yuan. Generally speaking, you would have to win the bid in the lottery to buy at that price, and the vast majority of people never get that chance. If you want to buy now, you have to buy it from other holders in the market. On March 23, the closing price of Shangyin Convertible Bond was 123.305 yuan—meaning your purchase cost is already 23% higher than its face value.

Next, let’s see how much interest it can give you as a bond. The coupon rate of Shangyin Convertible Bond increases year by year, paid over six years. The first year is 0.3%, the second year 0.8%, the third year 1.5%, the fourth year 2.8%, the fifth year 3.5%, and the sixth year 4%.

Because it matures in January next year, you only have one year of interest left to receive—so that’s 4 yuan. Also, the interest on convertible bonds is subject to a 20% individual income tax, leaving you with only 3.2 yuan in hand. If you buy this bond for 123.3 yuan now, at maturity Shangyin Convertible Bond will pay you 103.2 yuan after tax. So your net loss at maturity would be 20.1 yuan. That’s why when the convertible bond’s market price is far higher than its face value plus interest, buying it doesn’t even protect your principal.

So why would anyone still be willing to spend 123.3 yuan to buy it? There is only one reason: betting that Shanghai Bank’s stock price will rise. The conversion price of Shangyin Convertible Bond is 8.57 yuan. Currently, Shanghai Bank’s stock price is 9.65 yuan (closing price on March 23). If you buy Shangyin Convertible Bond for 123.3 yuan and Shanghai Bank rises to 12 yuan, you exercise the conversion right. You convert the convertible bond with a face value of 100 yuan into stock at the price of 8.57 yuan, roughly converting into 11 shares. Then you sell those 11 shares on the stock market at 12 yuan per share, getting 132 yuan. Subtracting your original purchase cost, you earn 8.7 yuan—which is far better than losing 20 yuan by holding to maturity.

On the other hand, if Shanghai Bank’s stock price falls to 8 yuan, the conversion price is higher than the market price, so conversion would only get you back 88 yuan. Then you can only treat Shangyin Convertible Bond like an ordinary bond, holding it until maturity and receiving 103.2 yuan. You still lose money, but at least the loss is smaller.

Of course, there is a third option: sell your Shangyin Convertible Bond to other investors. As long as the selling price is higher than your buy-in price of 123.3 yuan (also adding any transaction fees), you can profit from the difference.

The price of convertible bonds will move along with the underlying stock price. When the underlying stock rises, the convertible bond price rises; when the underlying stock falls, the convertible bond price also bears the pressure in sync, and even driven by market sentiment, the volatility is no less than that of the underlying stock. Historically, the price of the Yingke Convertible Bond once surged to a record high of 3618.19 yuan, while the Soutie Convertible Bond set a historical low of 18.001 yuan—perfectly illustrating the equity-like trait of convertible bonds: no upper limit on the upside, a bottom-line limitation on the downside, but that floor can still be broken.

More importantly, the principal-protection attribute of convertible bonds is not absolute. If the company that issued the convertible bonds runs into trouble—such as bankruptcy or delisting—and can’t pay back the money, then your convertible bonds also face the risk of principal loss. On March 12 this year, the Soutie Convertible Bond already matured. In theory, the company should complete repayment. But because its underlying stock, *ST Soutie, is insolvent and has been listed as a dishonest party subject to enforcement, investors will most likely be unable to recover the principal and interest. In this respect, the risks of convertible bonds are completely consistent with those of other bonds.

Convertible bond fund risks are far higher than pure bond funds

Returning to the funds at the beginning that mainly invest in convertible bonds, they will have these risks as well. The NAV per unit of a convertible bond fund can fluctuate very sharply: when they rise, they surge like stock funds; when they fall, they do so just as decisively—completely different from those steady, well-behaved pure bond funds. If you buy bond funds to smooth portfolio volatility, you should keep your eyes open and clearly understand what kind of bond fund you’re buying before getting into it. Do not be misled by the name “convertible bond” and treat a high-risk product as a reliable downside-protection tool.

Convertible bond fund maximum drawdown overview

Data source: Wind Information, as of 2026-03-23

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