How should a convertible bond be decomposed?

Song-Ping Zhu () and Jing Zhang

Decisions in Economics and Finance, 2012, vol. 35, issue 2, 113-149

Abstract: In this paper, a new decomposition approach for valuing convertible bonds (CBs) is presented. Through developing an appropriate integral representation for the value of convertible bonds, we show that an extra premium associated with the holder’s early conversion right exists in addition to the traditional split of a convertible bond into a straight bond plus an option. Three distinct cases, CBs with zero-coupon, continuous coupon and discrete coupon payments, are discussed in this article. Also, to validate our integral formulation, a numerical implementation for the solution of the CB value is conducted and some preliminary results are presented. Copyright Springer-Verlag 2012

Keywords: Convertible bonds; Decomposition; Optimal conversion boundary; Integral equation; Discrete coupon; G13; C02 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10203-011-0118-y

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