Two methods for valuing convertible bonds --A comparison

Tomas Sörensson

Scandinavian Journal of Management, 1993, vol. 9, issue Supplement 1, S129-S139

Abstract: Two valuation models for convertible bonds are compared in this paper. The first model has the stock value as the underlying variable. This model is related to the LYON model by McConnell and Schwartz [Journal of Finance (1986), Vol. 41, pp. 561-577]. The second model, originally developed by Brennan and Schwartz [Journal of Finance (1977), Vol. 32, pp. 1699-1715], has the value of the firm as the underlying variable. The first model uses a risk-adjusted interest rate for discounting the bond part and the risk-free interest rate for the option part. The second model uses the risk-free interest rate exclusively. The empirical comparison made on seven issues of convertible bonds in Sweden shows that the values obtained with the two models are rather different.

Keywords: Convertible; bonds; valuation; option; theory; corporate; finance (search for similar items in EconPapers)
Date: 1993
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