The Role of Time Value in Convertible Bond Call Policy

Posted: 5 Sep 2011 Last revised: 28 Jan 2012

See all articles by Emanuele Bajo

Emanuele Bajo

University of Bologna - Department of Economics

Massimiliano Barbi

University of Bologna - Department of Management

Date Written: September 3, 2011

Abstract

Since the seminal work of Ingersoll (1977b) the optimal time in which a firm should redeem its outstanding convertible bonds has received large attention by the financial literature. Several studies have put forward a number of possible costs and benefits for a firm if it interrupts the life of its convertible bonds prior to their contractual maturity. However, in this paper we argue that the managerial decision to call back a convertible bond is mainly driven by a fundamental variable almost neglected up until now: the time value extraction from bondholders’ conversion option. Accordingly, we propose a measure for the effective convenience of calling - which we define as net time value advantage - and we show, using a survival analysis, that it is more effective than previously proposed measures in explaining the firms’ observed call policy.

Keywords: Convertible bonds, Time value, Call policy, Fixed income

JEL Classification: G14, G32

Suggested Citation

Bajo, Emanuele and Barbi, Massimiliano, The Role of Time Value in Convertible Bond Call Policy (September 3, 2011). Journal of Banking and Finance, Vol. 36, pp. 550-563, 2012. Available at SSRN: https://ssrn.com/abstract=1922291

Emanuele Bajo (Contact Author)

University of Bologna - Department of Economics ( email )

Bologna
Italy

Massimiliano Barbi

University of Bologna - Department of Management ( email )

via Capo di Lucca 34
Bologna, 40126
Italy
+39 051 2098404 (Phone)
+39 051 246411 (Fax)

HOME PAGE: http://www.sites.google.com/site/massimilianobarbifinance/

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