The Role of Time Value in Convertible Bond Call Policy
Posted: 5 Sep 2011 Last revised: 28 Jan 2012
Date Written: September 3, 2011
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: Suggested Citation