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How should a convertible bond be decomposed?

Journal Article


Abstract


  • In this paper, a new decomposition approach for valuing convertible bonds (CBs) is presented. Through developing an appropriate integral representation for the value of convertible bonds, we show that an extra premium associated with the holder's early conversion right exists in addition to the traditional split of a convertible bond into a straight bond plus an option. Three distinct cases, CBs with zero-coupon, continuous coupon and discrete coupon payments, are discussed in this article. Also, to validate our integral formulation, a numerical implementation for the solution of the CB value is conducted and some preliminary results are presented. © 2011 Springer-Verlag.

Publication Date


  • 2012

Citation


  • Zhu, S. & Zhang, J. (2012). How should a convertible bond be decomposed?. Decisions in Economics and Finance, 35 (2), 113-149.

Scopus Eid


  • 2-s2.0-84866539914

Ro Metadata Url


  • http://ro.uow.edu.au/infopapers/2293

Has Global Citation Frequency


Number Of Pages


  • 36

Start Page


  • 113

End Page


  • 149

Volume


  • 35

Issue


  • 2

Place Of Publication


  • Italy

Abstract


  • In this paper, a new decomposition approach for valuing convertible bonds (CBs) is presented. Through developing an appropriate integral representation for the value of convertible bonds, we show that an extra premium associated with the holder's early conversion right exists in addition to the traditional split of a convertible bond into a straight bond plus an option. Three distinct cases, CBs with zero-coupon, continuous coupon and discrete coupon payments, are discussed in this article. Also, to validate our integral formulation, a numerical implementation for the solution of the CB value is conducted and some preliminary results are presented. © 2011 Springer-Verlag.

Publication Date


  • 2012

Citation


  • Zhu, S. & Zhang, J. (2012). How should a convertible bond be decomposed?. Decisions in Economics and Finance, 35 (2), 113-149.

Scopus Eid


  • 2-s2.0-84866539914

Ro Metadata Url


  • http://ro.uow.edu.au/infopapers/2293

Has Global Citation Frequency


Number Of Pages


  • 36

Start Page


  • 113

End Page


  • 149

Volume


  • 35

Issue


  • 2

Place Of Publication


  • Italy