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Valuation Of Convertible Bonds With Sequential Conversion

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  • Wolfgang Bühler
  • Christian Koziol
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    Abstract

    In this paper, we characterize optimal conversion strategies and the related values of convertible bonds and stocks under a sequential conversion policy. Contrary to the existing literature, we consider firms that have both subordinated debt outstanding and convertible bonds. The additional debt results in wealth transfers among the holders of stock, convertible bonds, and additional debt, depending on the conversion strategy. These wealth transfers lead to remarkable differences in the optimal conversion policy and for the values of convertible bonds and stocks. It is possible that only a fraction of outstanding convertibles are converted at the last conversion date, that the stock value is partly strictly decreasing in the firm value, and partly decreasing in the dividend payment. It is also possible that certain stock values cannot occur when block conversion takes place, and that the value of a block-convertible bond is below and never above the corresponding value of a convertible bond under unresticted conversion.

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    Bibliographic Info

    Article provided by LMU Munich School of Management in its journal Schmalenbach Business Review.

    Volume (Year): 54 (2002)
    Issue (Month): 4 (October)
    Pages: 302-334

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    Handle: RePEc:sbr:abstra:v:54:y:2002:i:4:p:302-334

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    Cited by:
    1. Pascal François & Georges Hubner & Nicolas Papageorgiou, 2009. "A Dynamic Model of Risk-Shifting Incentives with Convertible Debt," Cahiers de recherche 0930, CIRPEE.
    2. Nikunj Kapadia & Gregory Willette, 2012. "Equilibrium exercise of European warrants," Review of Derivatives Research, Springer, vol. 15(2), pages 129-156, July.
    3. Ammann, Manuel & Kind, Axel & Wilde, Christian, 2008. "Simulation-based pricing of convertible bonds," Journal of Empirical Finance, Elsevier, vol. 15(2), pages 310-331, March.

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