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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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File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2001/2001cf140.pdf
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Bibliographic Info

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
Date of revision:
Handle: RePEc:tky:fseres:2001cf140

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References

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  1. 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.
  2. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
  3. Brennan, M J & Schwartz, Eduardo S, 1977. "Convertible Bonds: Valuation and Optimal Strategies for Call and Conversion," Journal of Finance, American Finance Association, American Finance Association, vol. 32(5), pages 1699-1715, December.
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Cited by:
  1. 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.
  2. Alex W.H. Chan & Nai-fu Chen, 2006. "Convertible Bond Underpricing: Renegotiable Covenants, Seasoning and Convergence (Published in "Management Science", Vol. 53, No. 11, November 2007, pp. 1793.1814. )," CARF F-Series, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo CARF-F-075, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  3. Siddiqi, Mazhar A., 2009. "Investigating the effectiveness of convertible bonds in reducing agency costs: A Monte-Carlo approach," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 49(4), pages 1360-1370, November.
  4. Yagi, Kyoko & Takashima, Ryuta, 2012. "The impact of convertible debt financing on investment timing," Economic Modelling, Elsevier, vol. 29(6), pages 2407-2416.
  5. Ammann, Manuel & Kind, Axel & Wilde, Christian, 2008. "Simulation-based pricing of convertible bonds," Journal of Empirical Finance, Elsevier, Elsevier, vol. 15(2), pages 310-331, March.
  6. Ali Bora Yigitsbasioglu & Dmitri Lvov & Naoufel El-Bachir, 2004. "Pricing Convertible Bonds by Simulation," ICMA Centre Discussion Papers in Finance, Henley Business School, Reading University icma-dp2004-14, Henley Business School, Reading University, revised Aug 2004.
  7. 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.
  8. Alex W.H. Chan & Nai-fu Chen, 2006. "Convertible Bond Underpricing: Renegotiable Covenants, Seasoning and Convergence," CIRJE F-Series, CIRJE, Faculty of Economics, University of Tokyo CIRJE-F-437, CIRJE, Faculty of Economics, University of Tokyo.

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