Abstract
This article presents a trinomial tree model for pricing zero-coupon convertible bonds (CBs) subject to equity, market and default risk. Interest rates are assumed to follow a mean-reverting square root process. Equity prices prior to default are modeled as a constant elasticity of variance (CEV) process, which is capable of reproducing the volatility smile observed in the empirical data. Based on the empirical results in [1], the default intensity is specified as a function of the stock price and interest rate. Embedded call and put options as well as the correlation between interest rates and equity prices are also considered. A numerical example shows the use of the model and numerical results explain the impact of different parameters on the prices of CBs.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
