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The use and pricing of convertible bonds

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  • K. G. Nyborg

Abstract

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.

Suggested Citation

  • K. G. Nyborg, 1996. "The use and pricing of convertible bonds," Applied Mathematical Finance, Taylor & Francis Journals, vol. 3(3), pages 167-190.
    • Handle: RePEc:taf:apmtfi:v:3:y:1996:i:3:p:167-190
    DOI: 10.1080/13504869600000009
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    References listed on IDEAS

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    1. Miller, Merton H & Rock, Kevin, 1985. "Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-1051, September.
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    1. 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.
    2. Marco Realdon, 2004. "Valuation Of Exchangeable Convertible Bonds," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 7(06), pages 701-721.
    3. Finnerty, John D., 2015. "Valuing convertible bonds and the option to exchange bonds for stock," Journal of Corporate Finance, Elsevier, vol. 31(C), pages 91-115.
    4. Xu, Ruxing, 2011. "A lattice approach for pricing convertible bond asset swaps with market risk and counterparty risk," Economic Modelling, Elsevier, vol. 28(5), pages 2143-2153, September.
    5. Isagawa, Nobuyuki, 2000. "Convertible debt: an effective financial instrument to control managerial opportunism," Review of Financial Economics, Elsevier, vol. 9(1), pages 15-26.
    6. Marco Realdon, "undated". "Convertible Subordinated Debt Valuation and "Conversion in Distress"," Discussion Papers 03/18, Department of Economics, University of York.
    7. Kimura, Toshikazu & Shinohara, Toshio, 2006. "Monte Carlo analysis of convertible bonds with reset clauses," European Journal of Operational Research, Elsevier, vol. 168(2), pages 301-310, January.
    8. Duffie, Darrell, 2005. "Credit risk modeling with affine processes," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2751-2802, November.
    9. Didier Cossin & Benoît Leleux & Entela Saliasi, 2002. "Understanding the Economic Value of Legal Covenants in Investment Contracts: A Real-Options Approach to Venture Equity Contracts," Swiss Finance Institute Research Paper Series rp63, Swiss Finance Institute.
    10. Jonathan A. Batten & Karren Lee-Hwei Khaw & Martin R. Young, 2014. "Convertible Bond Pricing Models," Journal of Economic Surveys, Wiley Blackwell, vol. 28(5), pages 775-803, December.
    11. Yuriy Zabolotnyuk & Robert Jones & Chris Veld, 2010. "An Empirical Comparison of Convertible Bond Valuation Models," Financial Management, Financial Management Association International, vol. 39(2), pages 675-706, June.
    12. 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.
    13. Sha Lin & Song‐Ping Zhu, 2022. "Pricing callable–puttable convertible bonds with an integral equation approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(10), pages 1856-1911, October.
    14. Xiaoyu Tan & Zili Zhang & Xuejun Zhao & Shuyi Wang, 2022. "DeepPricing: pricing convertible bonds based on financial time-series generative adversarial networks," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-38, December.
    15. Yang, Xiaofeng & Yu, Jinping & Xu, Mengna & Fan, Wenjing, 2018. "Convertible bond pricing with partial integro-differential equation model," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 152(C), pages 35-50.
    16. Feng, Yun & Huang, Bing-hua & Young, Martin & Zhou, Qi-yuan, 2015. "Decomposing and valuing convertible bonds: A new method based on exotic options," Economic Modelling, Elsevier, vol. 47(C), pages 193-206.
    17. Nobuyuki Isagawa, 2000. "Convertible debt: an effective financial instrument to control managerial opportunism," Review of Financial Economics, John Wiley & Sons, vol. 9(1), pages 15-26, March.
    18. Yang, Jingyang & Choi, Yoon & Li, Shenghong & Yu, Jinping, 2010. "A note on "Monte Carlo analysis of convertible bonds with reset clause"," European Journal of Operational Research, Elsevier, vol. 200(3), pages 924-925, February.
    19. Zhou, Qi-Yuan & Wu, Chong-Feng & Feng, Yun, 2007. "Decomposing and valuing callable convertible bonds: a new method based on exotic options," MPRA Paper 7421, University Library of Munich, Germany.
    20. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.

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