For a convertible bond, it is the excess of running (current) yield over equity dividend yield:
Convertible yield advantage = convertible running yield- equity dividend yield
It reflects the advantage from holding the convertible bond rather than exercising the right of conversion to acquire the dividends paid by the underlying common stock. All other things equal, the higher the yield advantage, the faster a holder will recover the premium paid for the downside protection. The yield advantage can be though of as a positive cost of carry from holding the convertible bond.
For example, the bond’s current yield is reported as 10.5%, whereas the dividend yield of its underlying common stock is 8.9%, then the yield advantage is:
Convertible yield advantage = 10.5% – 8.9% = 1.6%
