Valuing callable convertible bonds: a reduced approach

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Valuing callable convertible bonds: a reduced approach

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F. André-le Pogamp
F. Moraux

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Franck Moraux

Abstract

This paper analyses the pricing of corporate callable convertible bonds. It reconciles the applicability of the reduced form approach with optimal strategies usually discussed in the structural approach. One demonstrates that some conditions causing rational voluntary conversions may be effectively neglected. The main contribution of the paper is to show that adjusted American Capped Call options well duplicate 'classical' optimal strategies. Numerical experiments are then conducted.

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Article provided by Taylor and Francis Journals in its journal Applied Financial Economics.

Volume (Year): 14 (2004)
Issue (Month): 10 (June)
Pages: 743-749
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Handle: RePEc:taf:apfiec:v:14:y:2004:i:10:p:743-749

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References listed on IDEAS
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Asquith, Paul & Mullins, David W, Jr, 1991. " Convertible Debt: Corporate Call Policy and Voluntary Conversion," Journal of Finance, American Finance Association, vol. 46(4), pages 1273-89, September. [Downloadable!] (restricted)
Brennan, M J & Schwartz, Eduardo S, 1977. "Convertible Bonds: Valuation and Optimal Strategies for Call and Conversion," Journal of Finance, American Finance Association, vol. 32(5), pages 1699-1715, December. [Downloadable!] (restricted)
Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
Jarrow, Robert A & Lando, David & Turnbull, Stuart M, 1997. "A Markov Model for the Term Structure of Credit Risk Spreads," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(2), pages 481-523.
Harris, Milton & Raviv, Artur, 1985. " A Sequential Signalling Model of Convertible Debt Call Policy," Journal of Finance, American Finance Association, vol. 40(5), pages 1263-81, December. [Downloadable!] (restricted)

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