Revisiting Optimal Call Policy for Convertibles

Posted: 8 Mar 2002

See all articles by Alexander W. Butler

Alexander W. Butler

Rice University - Jesse H. Jones Graduate School of Business

Abstract

When a company calls its convertible bonds, it typically must give the convertible bondholders a notice period of approximately 30 days to decide whether to convert the bonds. This important institutional detail substantially affects the optimal call policy for convertible bonds. When the company calls the bonds, it fixes the price at which bondholders can redeem them, effectively giving bondholders a 30-day put option. The optimal time to call the convertibles minimizes the value of the conversion option net of the put option. This optimization problem is solved here, and a simple decision rule for the company results. This solution contains those of previous researchers as a special case.

Suggested Citation

Butler, Alexander W., Revisiting Optimal Call Policy for Convertibles. Financial Analysts Journal, Vol. 58, No. 1. Available at SSRN: https://ssrn.com/abstract=301312

Alexander W. Butler (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

MS 531
Houston, TX 77005
United States
713-348-6341 (Phone)

HOME PAGE: http://www.owlnet.rice.edu/~awbutler/

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