Perpetual convertible bonds with credit risk
نویسندگان
چکیده
A convertible bond is a security that the holder can convert into a specified number of underlying shares. We enrich the standard model by introducing some default risk of the issuer. Once default has occured payments stop immediately. In the context of a reduced form model with infinite time horizon driven by a Brownian motion, analytical formulae for the no-arbitrage price of this American contingent claim are obtained and characterized in terms of solutions of free boundary problems. It turns out that the default risk changes the structure of the optimal stopping strategy essentially. Especially, the continuation region may become a disconnected subset of the state space.
منابع مشابه
Perpetual Convertible Bonds
A firm issues a convertible bond. At each subsequent time, the bondholder must decide whether to continue to hold the bond, thereby collecting coupons, or to convert it to stock. The firm may at any time call the bond. Because calls and conversions often occur far from maturity, it is not unreasonable to model this situation with a perpetual convertible bond, i.e., a convertible coupon-paying b...
متن کاملBinary Tree Pricing to Convertible Bonds with Credit Risk under Stochastic Interest Rates
and Applied Analysis 3
متن کاملValuation and Optimal Strategies of Convertible Bonds
This article presents a contingent claim valuation of a callable convertible bond with the issuer’s credit risk. The optimal call, voluntary conversion, and bankruptcy strategies are jointly determined by shareholders and bondholders to maximize the equity value and the bond value, respectively. This model not only incorporates tax benefits, bankruptcy costs, refunding costs, and a call notice ...
متن کاملGame option models of convertible bonds: Determinants of call policies
The interaction of bondholder's conversion and issuer's call in a convertible bond leads to a game option model between the two counterparties. Like typical pricing models for corporate debts, the fair value of a convertible bond is highly dependent on issuer's credit risk, tax benefits of coupons and other structural features. The convertible bond pricing models in the literature can be catego...
متن کاملPerpetual convertible bonds in jump-diffusion models
A convertible (callable) bond is a security that the holder can convert into a specified number of underlying shares. In addition, the issuer can recall the bond, paying some compensation, or force the holder to convert it immediately. We give an explicit solution to the corresponding optimal stopping game in the context of a reduced form model driven by a Brownian motion and a compound Poisson...
متن کامل