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CONVERTIBLE BOND PRICING MODELS
Author(s) -
Batten Jonathan A.,
Khaw Karren LeeHwei,
Young Martin R.
Publication year - 2014
Publication title -
journal of economic surveys
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.657
H-Index - 92
eISSN - 1467-6419
pISSN - 0950-0804
DOI - 10.1111/joes.12016
Subject(s) - convertible bond , embedded option , convertible arbitrage , bond , bond valuation , financial economics , corporate bond , economics , equity (law) , valuation (finance) , stock (firearms) , business , convertible , bond market , finance , capital asset pricing model , arbitrage pricing theory , structural engineering , risk arbitrage , engineering , mechanical engineering , political science , law
Convertible bonds are an important segment of the corporate bond market, with worldwide outstandings approaching US$235 billion. Simple pricing models value a convertible bond as being equivalent to a straight bond with an embedded option that enables the bond holder to convert to a specific amount of common stock. The straight bond is subject to both interest rate and credit risk, whereas the option to convert is dependent on the underlying stock price, which exposes the convertible bond holder to equity risk. The complexity of these features means that convertible bonds tend to be treated casually in major derivatives and corporate finance textbooks. This paper presents a survey of the theoretical and empirical aspects of convertible bond pricing. The limitations of these studies are highlighted to identify those areas of research that may improve the valuation process and facilitate the application of these securities for corporate financing.