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The convertible bond market has recently gained increasing significance on a global basis with particularly notable growth among very fast growing companies hungry for capital. Philips' Convertible Bond Markets is a comprehensive assessment of this market place, illustrating clearly how investors of all risk persuasions may best utilise the instrument. It will be of great interest both to academics and to professionals including equity fund managers, bond fund managers, 'swaps' teams, stock loan departments, risk controllers, treasurers and proprietary traders.

AbstractThis research applies the options pricing model to the valuation of convertible bonds. A numeric algorithm is used to obtain theoretical values for a sample of 103 convertible bond issues. When market prices are compared with model valuations, the means are not significantly different, and 90 percent of model predictions are within 10 percent of market values. As a further test, the sample is divided on the basis of whether the model prices are (1) greater or (2) less than market prices. Returns are compared over a subsequent three‐year holding period. The results indicate that without risk adjustment, the returns for the subsample identified by the model as "undervalued" (model prices exceed market prices) are significantly greater than returns for the subsample identified by the model as "overvalued" (market prices exceed model prices).

AbstractLittle empirical evidence is available on the nature of the trade‐offs between the debt‐ and equity‐like components of convertible bonds. Such information would be useful to firms considering the issuance of convertible bonds. Furthermore, complete understanding of the leverage implications of convertible bond issuance depends on the market's view of the proportions of the implicit debt/equity mix. The current study develops a two‐equation model that estimates the relative contributions made to the value of primary issue convertible bonds by the debt and implicit warrant components. The model's distinct approach affords an opportunity to evaluate the empirical relationship between the value of the implicit warrant and the theoretical determinants of that value by isolating the individual components of the convertible bond's value.

AbstractThe embedded option implicit in Treasury issues has recently attracted a lot of attention. Studies in the callable US Treasury bond market suggest that prices of callable bonds often imply negative values for the call option embedded in them. Although options embedded in Treasury issues have been the focus of a lot of research, options embedded in corporate bonds have not received as great attention. This is the first study which conducts a complete examination of the pricing behaviour of convertible bonds with respect to pricing conditions implied by the presence of the embedded option. Results indicate that convertible bonds are often underpriced to the extent that negative conversion option values are implied.RésuméL'option enchǎssée implicite dans les émissions du Trésor a récemment suscité beaucoup d'attention. Des études sur le marché des obligations remboursables à vue du Trésor américain suggèrent que les coǒts des obligations remboursables à vue sous‐entendent souvent des valeurs négatives pour l'option d'achat qui y est enchǎssée. Bien que les options enchǎssées dans les émissions du Trésor ont été le sujet central de plusieurs recherches, les options enchǎssées dans les obligations de sociétés n'ont pas reçu une aussi grande attention. Ceci est la première étude qui conduit un examen complet du comportement de la valorisation des obligations convertibles relativement aux conditions de valorisation sous‐entendues par la présence des options enchǎssées. Les résultats indiquent que les obligations convertibles sont souvent en vente à un prix inférieur à leurs vraies valeurs à tel point que des valeurs négatives d'option de conversion sont sous‐entendues.

We model convertible bond calls under asymmetric information where, unlike Harris and Raviv (1985), we consider a nonzero call price and a call notice period. In the model, the use of underwriters conveys negative information. Consequently, the stock price decline is greater for underwritten calls than for nonunderwritten calls. Furthermore, underwritten calls are made earlier and when the conversion option is less deep in the money. Underwriting commissions and the stock price decline associated with a call are negatively related to the extent that the conversion option is in the money before the call. Empirical evidence in this paper and Singh, Cowan, and Nayar (1991) are consistent with the model's predictions.