Valuation of Exchangeable Convertible Bonds

Marco Realdon

Discussion Papers from Department of Economics, University of York

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 (search for similar items in EconPapers)
JEL-codes: G13 G33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-rmg
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: VALUATION OF EXCHANGEABLE CONVERTIBLE BONDS (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:03/17

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