Convertible Bond Pricing Models

29 Pages Posted: 28 Oct 2014

See all articles by Jonathan A. Batten

Jonathan A. Batten

Universiti Utara Malaysia

Karren Khaw

Massey University - School of Economics and Finance

Martin R. Young

Massey University - School of Economics and Finance

Date Written: December 2014

Abstract

Convertible bonds are an important segment of the corporate bond market, with worldwide outstandings approaching US$235 billion. Simple pricing models value a convertible bond as being equivalent to a straight bond with an embedded option that enables the bond holder to convert to a specific amount of common stock. The straight bond is subject to both interest rate and credit risk, whereas the option to convert is dependent on the underlying stock price, which exposes the convertible bond holder to equity risk. The complexity of these features means that convertible bonds tend to be treated casually in major derivatives and corporate finance textbooks. This paper presents a survey of the theoretical and empirical aspects of convertible bond pricing. The limitations of these studies are highlighted to identify those areas of research that may improve the valuation process and facilitate the application of these securities for corporate financing.

Keywords: Corporate bonds, Convertible bond pricing models, Contingent claim approach

Suggested Citation

Batten, Jonathan A. and Khaw, Karren Lee-Hwei and Young, Martin R., Convertible Bond Pricing Models (December 2014). Journal of Economic Surveys, Vol. 28, Issue 5, pp. 775-803, 2014. Available at SSRN: https://ssrn.com/abstract=2515598 or http://dx.doi.org/10.1111/joes.12016

Jonathan A. Batten (Contact Author)

Universiti Utara Malaysia ( email )

School of Economics, Finance and Banking
Sintok, Kedah 06010
Malaysia

Karren Lee-Hwei Khaw

Massey University - School of Economics and Finance ( email )

Private Bag 11-222
Palmerston North, 30974
New Zealand

Martin R. Young

Massey University - School of Economics and Finance ( email )

Private Bag 11222
Palmerston North, 4442
New Zealand

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