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Pricing Convertible Bonds with Default Risk: A Duffie-Singleton Approach

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Author Info
Akihiko Takahashi (Graduate School of Mathematical Science, University of Tokyo)
Takao Kobayashi (Faculty of Economics, University of Tokyo)
Naruhisa Nakagawa (Equity Division, Goldman Sachs (Japan), Ltd.)
Abstract

We propose a new method to value convertible bonds(CBs). In particular, we explicitly take default risk into consideration based on Duffie-Singleton(1999), and provide a consistent and practical method for relative pricing of securities issued by a firm such as CBs, non-convertible corporate bonds and equities. Moreover, we show numerical examples using Japanese CBs' data, and compare our model with other practical models.

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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-140.

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Length: 34 pages
Date of creation: Nov 2001
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Handle: RePEc:tky:fseres:2001cf140

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  1. Longstaff, Francis A & Schwartz, Eduardo S, 1995. " A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July. [Downloadable!] (restricted)
  2. McConnell, John J & Schwartz, Eduardo S, 1986. " LYON Taming," Journal of Finance, American Finance Association, vol. 41(3), pages 561-76, July. [Downloadable!] (restricted)
  3. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
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  4. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(4), pages 687-720.
  5. Nelson, Daniel B & Ramaswamy, Krishna, 1990. "Simple Binomial Processes as Diffusion Approximations in Financial Models," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(3), pages 393-430. [Downloadable!] (restricted)
  6. Brennan, Michael J. & Schwartz, Eduardo S., 1980. "Analyzing Convertible Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(04), pages 907-929, November. [Downloadable!]
  7. Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March. [Downloadable!] (restricted)
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