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How should a convertible bond be decomposed?

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  • Song-Ping Zhu
  • Jing Zhang

Abstract

In this paper, a new decomposition approach for valuing convertible bonds (CBs) is presented. Through developing an appropriate integral representation for the value of convertible bonds, we show that an extra premium associated with the holder’s early conversion right exists in addition to the traditional split of a convertible bond into a straight bond plus an option. Three distinct cases, CBs with zero-coupon, continuous coupon and discrete coupon payments, are discussed in this article. Also, to validate our integral formulation, a numerical implementation for the solution of the CB value is conducted and some preliminary results are presented. Copyright Springer-Verlag 2012

Suggested Citation

  • Song-Ping Zhu & Jing Zhang, 2012. "How should a convertible bond be decomposed?," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 35(2), pages 113-149, November.
    • Handle: RePEc:spr:decfin:v:35:y:2012:i:2:p:113-149
    DOI: 10.1007/s10203-011-0118-y
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    References listed on IDEAS

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    Cited by:

    1. Feng, Yun & Huang, Bing-hua & Huang, Yu, 2016. "Valuing resettable convertible bonds: Based on path decomposing," Finance Research Letters, Elsevier, vol. 19(C), pages 279-290.
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    3. Kim, Byung-June & Jang, Bong-Gyu, 2021. "Convertible bond valuation with regime switching," Chaos, Solitons & Fractals, Elsevier, vol. 150(C).

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    More about this item

    Keywords

    Convertible bonds; Decomposition; Optimal conversion boundary; Integral equation; Discrete coupon; G13; C02;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics

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