VALUATION OF EXCHANGEABLE CONVERTIBLE BONDS

Marco Realdon ()
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Marco Realdon: Department of Economics and Related Studies, University of York, Heslington, York YO10 5DD, UK

International Journal of Theoretical and Applied Finance (IJTAF), 2004, vol. 07, issue 06, 701-721

Abstract: This paper provides a structural valuation model for exchangeable convertible bonds, since such bonds are widespread by now. The model is solved through the Hopscotch finite difference method. As the issuer owns the underlying shares, exchangeable convertibles may be called and the exchange option may be exercised even as the issuer experiences financial distress. The value of exchangeable convertibles always decreases in the volatility of the issuer's assets (unlike the value of ordinary convertibles) and decreases in the correlation between the underlying shares and the issuer's assets. The analysis confirms that the dominant motive for issuing exchangeable convertibles is likely to be to dispose of the underlying shares.

Keywords: Bond valuation; structural model; default risk; exchangeable convertible; Hopscotch finite difference method; JEL classification code: G13; JEL classification code: G33 (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1142/S0219024904002657

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