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How should a convertible bond be decomposed?

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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.

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Authors and Affiliations

  1. School of Mathematics and Applied Statistics, University of Wollongong, Wollongong, NSW, 2522, Australia

    Song-Ping Zhu & Jing Zhang

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  1. Song-Ping Zhu
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  2. Jing Zhang
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Correspondence to Song-Ping Zhu.

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Zhu, SP., Zhang, J. How should a convertible bond be decomposed?. Decisions Econ Finan 35, 113–149 (2012). https://doi.org/10.1007/s10203-011-0118-y

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  • DOI: https://doi.org/10.1007/s10203-011-0118-y

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