PRICING A CALLABLE CONVERTIBLE BOND: A CASE STUDY

Research output: Contribution to journalArticlepeer-review

Abstract

In this note I use a simple method to value a complex hybrid security. I evaluate a convertible callable bond issue, adopting an incremental approach where the different features of the hybrid security are added sequentially. In this setting, I solve backwards the game played at each node between the firm and the investors to understand how the price of the callable convertible bond is determined on the basis of the equilibrium behaviour of the players. I show how the different features affect the price of the security, analyzing the security’s characteristics with an optimal capital structure perspective. I provide a simple intuition of why the callable convertible bond value does not necessarily goes up with increases of the stock variance.
Original languageEnglish
Pages (from-to)116-146
Number of pages31
JournalANNALI DELLA FACOLTÀ DI ECONOMIA. UNIVERSITÀ DI PALERMO
Publication statusPublished - 2013

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