Pricing Of Convertible Bonds Research Articles

The use and pricing of convertible bonds

This paper provides an overview of the main results of the literature on pricing convertible bonds. It covers simple convertible bonds which are non-callable and can be converted only at maturity as well as more complicated callable and puttable convertible bonds under stochastic interest rates. The paper also reviews the main results in the literature on why firms issue convertible bonds. The two most often cited rationales for issuing convertible bonds - as delayed equity, and to sweeten debt - are discussed in the context of both asymmetric information and agency models of capital structure. Finally, the paper provides some thoughts on incorporating strategic issues into the pricing of convertible bonds.

The Effect of Embedded Options on the Financial Performance of Convertible Bond Funds

This study is the first to analyze the pricing of convertible bonds by examining the financial performance of open-end convertible bond funds. The findings indicate that (1) in general, convertible bonds did not outperform straight low-grade corporate bonds during the study period, January 1962 through September 1994; (2) convertible bonds are significantly more equitylike and significantly less bondlike than low-grade bonds; and (3) convertible bonds display a strong January effect. The results suggest that the equity call option embedded in convertible bonds was appropriately priced during the study period.

Determinants of callable convertible bond prices

A new model is proposed in this paper that efficiently estimates the after-market prices of callable convertible bonds. The proposed model is shown to be fairly stable over time and across firm size. The paper also shows that, among other factors, call price and bankruptcy indicators are significant determinants of callable convertible bond prices, suggesting that a priori specification regarding the exercise of call option and the ignorance of firm's possible bankruptcy, as done in past studies, are inappropriate for convertible bond price estimation.

A contingent-claims valuation of convertible securities

This paper examines the pricing of convertible bonds and preferred stocks. The optimal policies for call and conversion of these securities are determined via the criterion of dominance. The techniques underlying the Black-Scholes Option Model are used to price convertible securities as contingent claims on the firm as a whole.

An Econometric Model for Option Price with Implications for Investors' Expectations and Audacity

It will be convenient to consider in detail one specific form of security option: common stock purchase warrants. The model to be constructed can be extended mutatis mutanidis to any convertible security; Section 4 explicitly relates the model of warrant price to convertible bond price. A common stock purchase warrant is a security which the holder may exchange, at his option, for equity capital. The exchange may be effected by surrendering the warrant and a prespecified sum of money before a prespecified date to the corporation issuing the common stock. The act of conversion is usually called the exercise of the warrant, and the accompanying money the exercise price. Let X be the price of a unit of common, let Y be the price of a warrant, and let A be the exercise price of Y. For the remainder of this study, we shall measure X and Y in units of A so that Y/A = y is the price of 1/A warrants and X/A = x is the price of 1/A common shares. In this way, y plus $1 can be converted into shares