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The use and pricing of convertible bonds

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Author Info

  • 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.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/13504869600000009
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

Volume (Year): 3 (1996)
Issue (Month): 3 ()
Pages: 167-190

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Handle: RePEc:taf:apmtfi:v:3:y:1996:i:3:p:167-190

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Related research

Keywords: risky/risk-free assets; call and put features; debt pricing; convertible debt; adverse selection; moral hazard;

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Citations

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Cited by:
  1. Isagawa, Nobuyuki, 2000. "Convertible debt: an effective financial instrument to control managerial opportunism," Review of Financial Economics, Elsevier, vol. 9(1), pages 15-26.
  2. Duffie, Darrell, 2005. "Credit risk modeling with affine processes," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2751-2802, November.
  3. 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.
  4. 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.
  5. 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.
  6. Song-Ping Zhu & Jing Zhang, 2012. "How should a convertible bond be decomposed?," Decisions in Economics and Finance, Springer, vol. 35(2), pages 113-149, November.
  7. Marco Realdon, . "Valuation of Exchangeable Convertible Bonds," Discussion Papers 03/17, Department of Economics, University of York.
  8. Didier Cossin & BenoƮt 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.
  9. 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.
  10. 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.
  11. Marco Realdon, . "Convertible Subordinated Debt Valuation and "Conversion in Distress"," Discussion Papers 03/18, Department of Economics, University of York.
  12. Loncarski, I. & Horst, J.R. ter & Veld, C.H., 2006. "The Convertible Arbitrage Strategy Analyzed," Discussion Paper 2006-98, Tilburg University, Center for Economic Research.

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