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

  • 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.)

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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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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  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, vol. 32(5), pages 1699-1715, December.
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