Pricing convertible bonds based on a multi-stage compound-option model

Pricing convertible bonds based on a multi-stage compound option model

In this paper, we introduce the concept of multi-stage compound options to the valuation of convertible bonds. Rather than evaluating a nested high-dimensional integral that has arisen from the valuation of multistage compound options, we found that adopting the Finite Difference Method (FDM) to solve the BlackScholes equation for each stage actually resulted in a better numerical efficiency. B...

Simulation-Based Pricing of Convertible Bonds

We propose and empirically study a pricing model for convertible bonds based on Monte Carlo simulation. The method uses parametric representations of the early exercise decisions and consists of two stages. Pricing convertible bonds with the proposed Monte Carlo approach allows us to better capture both the dynamics of the underlying state variables and the rich set of real-world convertible bo...

A Two-Person Game for Pricing Convertible Bonds

A firm issues a convertible bond. At each subsequent time, the bondholder must decide whether to continue to hold the bond, thereby collecting coupons, or to convert it to stock. The bondholder wishes to choose a conversion strategy to maximize the bond value. Subject to some restrictions, the bond can be called by the issuing firm, which presumably acts to maximize the equity value of the firm...

The Valuation of Convertible Bonds: A Study of Alternative Pricing

Convertible debt represents 10% of all USA debt yet despite its ubiquity it still posses difficult modelling challenges. This paper investigates alternative convertible bond model specifications. The work reviews the literature on convertible debt valuation especially the methodologies adopted by practitioners. Inadequacies in the historical and current valuation methods are highlighted. The di...

Convertible Bonds in a Defaultable Diffusion Model