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Analyzing interactive call, default, and conversion policies for corporate bonds

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  • Liang‐Chih Liu
  • Tian‐Shyr Dai
  • Lei Zhou
  • Hao‐Han Chang

Abstract

This paper studies the timings of interactive call and conversion decisions made by bond issuers and holders, respectively, due to the presence of different embedded options. We develop a risk‐neutral‐valuation‐based game option model featuring bondholder–stockholder conflicts of interest. The presence of conversion (call) options possessed by the bondholders (issuers) accelerates the call (conversion) decisions. Granting bondholders additional put options further hastens call decisions and hence conversion decisions in response to call accelerations. Our empirical studies are consistent with past call policy research and support our interactive exercise analyses that explain the rationales behind early call and conversion phenomena.

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  • Liang‐Chih Liu & Tian‐Shyr Dai & Lei Zhou & Hao‐Han Chang, 2022. "Analyzing interactive call, default, and conversion policies for corporate bonds," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(8), pages 1597-1638, August.
    • Handle: RePEc:wly:jfutmk:v:42:y:2022:i:8:p:1597-1638
    DOI: 10.1002/fut.22359
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    1. Liwei Jin & Xianghui Yuan & Li Peiran & Hailun Xu & Feng Lian, 2023. "Option features and price discovery in convertible bonds," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(3), pages 384-403, March.

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