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The Valuation and Optimal Policies of Puttable Convertible Bonds

Author

Listed:
  • Joseph Adegboyegun, Bolujo

    (Department of Mathematics, Faculty of Science, Ekiti State University, Nigeria)

Abstract

American-style convertible bonds commonly contain the put provision that allows the investors to put or sell their holdings to the issuer at preset prices and dates. The embedded put option includes a free boundary in addition to the conversion boundary. Because of the correlation of two moving boundaries with the convertible price, the valuation of puttable convertible bonds remains a classical problem in quantitative finance. This paper presents the valuation model of puttable convertible bonds under the Black-Scholes framework. We distinguish between the conventional pricing model and the current work by the realization of a jump in the put price across the hitting time. The jump condition permits the derivation of two recombining differential systems and we explore the impact of jump effect on the pricing dynamic of this innovative financial derivative.

Suggested Citation

  • Joseph Adegboyegun, Bolujo, 2019. "The Valuation and Optimal Policies of Puttable Convertible Bonds," Journal of Finance and Accounting Research, University of Management and Technology, Lahore, vol. 1(1), pages 29-33, February.
    • Handle: RePEc:ris:jfiacr:0002
    as

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    References listed on IDEAS

    as
    1. Joanna Błach & Gariela Łukasik, 2017. "The Role of Convertible Bonds in the Corporate Financing: Polish Experience," Springer Proceedings in Business and Economics, in: David Procházka (ed.), New Trends in Finance and Accounting, chapter 0, pages 665-675, Springer.
    2. Barone-Adesi, Giovanni & Bermudez, Ana & Hatgioannides, John, 2003. "Two-factor convertible bonds valuation using the method of characteristics/finite elements," Journal of Economic Dynamics and Control, Elsevier, vol. 27(10), pages 1801-1831, August.
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    More about this item

    Keywords

    Puttable convertible bonds; free boundary problem; jump conditions;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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