alternative models for evaluating convertible bond- review and integration

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1、AlternativeModelsforEvaluating68ConvertibleBond:ReviewandIntegrationLie-JaneKao,Cheng-FewLee,andPo-ChengWuAbstractThepriceofaconvertiblebondisdeterminedbythreestatevariables,theyare:thefirm’smarketvalueorpriceofcommonstock,thevalueofthefirm’sstraightbond,andthecreditriskoftheissuingfirm.Depe

2、ndingontheassumptionsmadeforthethreestatevariables,variouspricingmethodsfortheevaluationofconvertiblebondsaredeveloped.Thispaperclassifiespricingmethodsintothreetypes:(1)ThegraphicalapproachbyBrigham(JournalofFinance21:35–54,1966);(2)ThecalculusapproachbyBaumoletal.(TheQuarterlyJournalofEc

3、onomics80:48–59,1966),Poensgen(IndustrialManagementReview7:76–92,1965,IndustrialManagementReview7:83–88,1966),FrankleandHawkins(JournalofFinance30:207–210,1975);and(3)TheoptionpricingapproachpioneeredbyBrennanandSchwartz(TheJournalofFinance32:1699–1716,1977,JournalofFinancialandQuantitati

4、veAnalysis15(4):907–929,1980)andIngersoll(JournalofFinancialEconomics4:289–321,1977a,JournalofFinance2:463–478,b),whichcanbefurtherclassifiedbyasthosebasedonthestructuraldefaultmodelorthereduced-formdefaultmodel.Thethreetypesofpricingmethodsarereviewedandcomparedinthisarticle.KeywordsCalcu

5、lusapproachConvertiblebondCreditriskGraphicalapproachOptionpricingapproachReduced-formdefaultmodelStraightbondStructuraldefaultmodel68.1Introductionportion,whichallowsthebondholdertoreapthegainsduetoincreaseintheequityvaluebyconversion.Byissuingconvert-Aconvertiblebondwhichentitled

6、toasetoffixedclaimsisaiblebonds,thefirmscanloweritscostofdebtfundingcom-bondthatcanbeconvertedintocommonstocksattheowner’sparedtostraightdebtalone.Forinvestors,convertiblebondsoptionsubjecttoconditionsspecifiedintheindenture.There-offergreaterstabilityofincomethancommonstock.fore,convertible

7、bondsaretwoinstrumentsinone:oneistheTherearetwovarietiesofconvertiblebonds:callablevs.straightdebtinstrument,whichguaranteesafixedpaymentfornon-callableconvertibles.Usually,callableconvertiblesthelifeofthebond.Thesecondinstrumentistheequityhavethesameprovisionsasthei