How should a convertible bond be decomposed?

Authors

Song-Ping Zhu, University of WollongongFollow
Jing Zhang, University of WollongongFollow

RIS ID

67538

Publication Details

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

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.