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Valuation and optimal strategies of convertible bonds

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  • Szu‐Lang Liao
  • Hsing‐Hua Huang

Abstract

This article presents a contingent claim valuation of a callable convertible bond with the issuer's credit risk. The optimal call, voluntary conversion, and bankruptcy strategies are jointly determined by shareholders and bondholders to maximize the equity value and the bond value, respectively. This model not only incorporates tax benefits, bankruptcy costs, refunding costs, and a call notice period, but also takes account of the issuer's debt size and structure. The numerical results show that the predicted optimal call policies are generally consistent with recent empirical findings; therefore, calling convertible bonds too late or too early can be rational. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:895–922, 2006

Suggested Citation

  • Szu‐Lang Liao & Hsing‐Hua Huang, 2006. "Valuation and optimal strategies of convertible bonds," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 26(9), pages 895-922, September.
    • Handle: RePEc:wly:jfutmk:v:26:y:2006:i:9:p:895-922
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    Cited by:

    1. Liang‐Chih Liu & Tian‐Shyr Dai & Lei Zhou & Hao‐Han Chang, 2022. "Analyzing interactive call, default, and conversion policies for corporate bonds," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(8), pages 1597-1638, August.
    2. 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.

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