Valuing Convertible Bonds Based on LSRQM Method

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...

Perpetual 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 firm may at any time call the bond. Because calls and conversions often occur far from maturity, it is not unreasonable to model this situation with a perpetual convertible bond, i.e., a convertible coupon-paying b...

The Valuation of Convertible Bonds

Convertible Bonds with Call Notice Periods

In practice, convertible bonds can often be called only if notice is given to the holders. Most methods for valuing convertible bonds assume that the bond is continuously callable. In this paper, we develop an accurate PDE method for valuing convertible bonds with a finite notice period. Example computations are presented which illustrate the effect of varying notice periods. The results are co...

Perpetual convertible bonds in jump-diffusion models

A convertible (callable) bond is a security that the holder can convert into a specified number of underlying shares. In addition, the issuer can recall the bond, paying some compensation, or force the holder to convert it immediately. We give an explicit solution to the corresponding optimal stopping game in the context of a reduced form model driven by a Brownian motion and a compound Poisson...