Download or read book New Evidence on the Valuation Effects of Convertible Bond Calls written by Sudip Datta and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This study examines the wealth effects of convertible bond call announcements on stockholders, straight bondholders, called and non-called convertible debtholders. We document that forced conversions are associated with a significant loss in firm value. The results suggest that convertible call announcements can trigger both negative signal and wealth transfer effects. We show that at least part of the negative effect on stock prices results from wealth transfer to straight bondholders. Our analysis also lends empirical validity to the common contention that called convertible bondholders suffer wealth expropriation due to the elimination of the premium. The wealth effect on non-called convertible debtholders is insignificant. Cross-sectional analysis reveals that the negative signal effect is important in explaining bond, stock and firm excess returns. Finally, we present evidence that refutes the notion that bonds are called to relieve the firm from restrictive debt covenants.
Download or read book Convertible Bond Valuation and Pricing written by Marc A. Shivers and published by . This book was released on 2003 with total page 172 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Convertible Bond Calls written by Sudip Datta and published by . This book was released on 2003 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study resolves the puzzling evidence on convertible bonds by documenting that conversion-forcing calls are indeed bad news. Supporting the long-term implications of Harris and Raviv (1985), we document that the common stocks of calling firms substantially underperform their benchmarks by a median of 64% over the five-year post-call period. In contrast, firms that choose not to call their in-the-money convertibles exhibit no long-run abnormal performance. We show that studies drawing conclusions based on short-term price reversal immediately following the call fail to completely capture the valuation effect that occurs over a longer time horizon. We document that the market condition at the time of the call (issuance volume) and cash flow benefits related to the call (relation between dividend and after tax coupon payment) influence the post-call stock price performance. Our analysis also reveals that the post-call underperformance of high-growth firms is more pronounced than that of low-growth firms, indicating greater market exuberance associated with high-growth firms at the time of the call.
Download or read book The Handbook of Convertible Bonds written by Jan De Spiegeleer and published by John Wiley & Sons. This book was released on 2011-07-07 with total page 400 pages. Available in PDF, EPUB and Kindle. Book excerpt: This is a complete guide to the pricing and risk management of convertible bond portfolios. Convertible bonds can be complex because they have both equity and debt like features and new market entrants will usually find that they have either a knowledge of fixed income mathematics or of equity derivatives and therefore have no idea how to incorporate credit and equity together into their existing pricing tools. Part I of the book covers the impact that the 2008 credit crunch has had on the markets, it then shows how to build up a convertible bond and introduces the reader to the traditional convertible vocabulary of yield to put, premium, conversion ratio, delta, gamma, vega and parity. The market of stock borrowing and lending will also be covered in detail. Using an intuitive approach based on the Jensen inequality, the authors will also show the advantages of using a hybrid to add value - pre 2008, many investors labelled convertible bonds as 'investing with no downside', there are of course plenty of 2008 examples to prove that they were wrong. The authors then go onto give a complete explanation of the different features that can be embedded in convertible bond. Part II shows readers how to price convertibles. It covers the different parameters used in valuation models: credit spreads, volatility, interest rates and borrow fees and Maturity. Part III covers investment strategies for equity, fixed income and hedge fund investors and includes dynamic hedging and convertible arbitrage. Part IV explains the all important risk management part of the process in detail. This is a highly practical book, all products priced are real world examples and numerical examples are not limited to hypothetical convertibles. It is a must read for anyone wanting to safely get into this highly liquid, high return market.
Download or read book The Valuation of Convertible Bonds Classic Reprint written by Otto H. Poensgen and published by . This book was released on 2015-08-05 with total page 70 pages. Available in PDF, EPUB and Kindle. Book excerpt: Excerpt from The Valuation of Convertible Bonds Convertible Bonds are bonds that are convertible into another security at the option of the holder subject to conditions specified in the indenture, For our paper we will restrict the term 'convertible' to mean exchangeable for 'the common stock of the issuing corporation.' The restriction is not a stringent one: the author in examining publicly traded bonds issued between 1948 and 1963 by companies that are traded on an organized stock exchange (or over the counter) found no bonds which were excluded by that definition. The vast majority of nation-wide traded convertible bonds is not only unsecured, but even subordinated to prior or even after-acquired debt. Deducing from cum hoc to ergo propter hoc this has led many writers to state or hypothesize that one of the reasons, if not the principal one, to attach to the bond the convertibility feature was the necessity to have a sweetener make an otherwise unpalatable instrument acceptable to the investor. The conversion price indicates how many dollars of face value must be given up at conversion for each common share. Occasionally, we find a conversion ratio instead, stating into how many shares one debenture of $1,000. About the Publisher Forgotten Books publishes hundreds of thousands of rare and classic books. Find more at www.forgottenbooks.com This book is a reproduction of an important historical work. Forgotten Books uses state-of-the-art technology to digitally reconstruct the work, preserving the original format whilst repairing imperfections present in the aged copy. In rare cases, an imperfection in the original, such as a blemish or missing page, may be replicated in our edition. We do, however, repair the vast majority of imperfections successfully; any imperfections that remain are intentionally left to preserve the state of such historical works.
Download or read book Three Essays on the Pricing of Convertible Bonds and on Put call Parities written by Yuriy Zabolotnyuk and published by . This book was released on 2009 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis is a collection of three papers that have the valuation of derivative securities as a common theme. The first paper empirically compares three convertible bond valuation models. We use an innovative approach where all model parameters are estimated by the Marquardt (1963) algorithm using a subsample of convertible bond prices. The model parameters are then used for out-of-sample forecasts of convertible bond prices. The mean absolute deviation, which is calculated as the absolute difference between the model and the market price and expressed as a percentage of the market price, is 1.70% for the Ayache-Forsyth-Vetzal (2003) model, 1.74% for the Tsiveriotis-Fernandes (1998) model, and 2.12% for the Brennan-Schwartz (1980) model. For this and other measures of fit, the Ayache-Forsyth-Vetzal and the Tsiveriotis-Fernandes models outperform the Brennan-Schwartz model. The second paper examines the market memory effect in convertible bond markets. More specifically, we look at the pricing of convertible bonds issued after the original issuer adversely redeemed previous issues without giving an opportunity for investors to benefit from bond value appreciation. We find evidence that the market underprices new convertible bond issues of firms that call their bonds early. We also find that the degree of market underpricing depends on whether the convertibles are more debt- or equity-like. In the third paper, the European put-call parity condition is used to estimate the early exercise premium for American currency options traded on the Philadelphia Stock Exchange. Using a sample of 331 pairs of call and put options with the same exercise price and time to expiration, we find that the early exercise premium on average is 5.03% for put options and 4.60% for call options. The premia for both call and put options are strongly related to the interest rate differential and time to expiration. These results are important to consider when valuing American currency options using European option pricing models.
Download or read book Valuation Effects of Debt Offerings and Convertible Securities Redemptions written by Pao-chung Tang and published by . This book was released on 1990 with total page 148 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Convertible Bonds in Corporate Finance written by Pollarat Ekkayokkaya and published by . This book was released on 2011 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis makes three main contributions to the literature on convertible bond financing. First, we provide a new theoretical explanation for convertible bond financing. Unlike the existing theory, our new theory provides a rationale for the issuance of both callable and non-callable convertible bonds. We also undertake empirical tests of the implications of the new theory and find that the new theory is supported by the empirical evidence. Second, we empirically examine the way in which firms choose the design of convertible bonds and investigate the effect of financial constraints on the firms' convertible design decision. Consistent with our new theory, we find that the design of convertible bonds is influenced by both adverse selection costs and financial distress costs. Moreover, we find that the design of convertible bonds for relatively constrained firms is determined in a different manner from the design of convertible bonds for relatively unconstrained firms. Our findings suggest that taking into account the effect of financial constraints is important in the understanding of convertible design decisions. To the best of our knowledge, our study is the first to document the effect of financial constraints on choice of convertible design. Third, we empirically examine two alternative explanations for the late call of a convertible bond: the "optimal" call theory of Butler (2002) and the financial distress costs theory of Jaffee and Shleifer (1990). In contrast to the existing evidence reported in Altintig and Butler (2005), we find that the observed late calls cannot be explained by the effect of the notice period as incorporated in the optimal call theory of Butler (2002). The observed conversion premium is much higher than Butler's optimal conversion premium. On the other hand, we find strong empirical support for the financial distress costs theory. Firms do not make a conversion-forcing call until the conversion premium is large enough to avoid a failed conversion, which could give rise to financial distress. We find that by the time a call is made, the probability of failed conversion is very small and the cross-sectional variation in the conversion premium is mainly explained by potential distress costs.
Download or read book The Valuation and Calibration of Convertible Bonds written by Sanveer Hariparsad and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: A convertible bond (CB) is a hybrid security possessing the characteristics of both debt and equity. It gives the holder the right to convert the bond into a pre-specified number of shares (usually by the same issuer of the CB) until maturity of the bond, and may also contain additional features such as callability and putability. CB's along with all hybrid securities are difficult to value due to their uncertain income stream. In this dissertation several convertible bond valuation models are suggested, but with particular attention to the calibration of the underlying inputs into the model and also by taking default risk into account, which is extremely important given the subordination of convertibles. The models range from the basic component models that decompose the CB into a straight bond and an exchange/call option: to more sophisticated ones consisting of stochastic interest rates, default risk, volatility structures, and even some exotics such as exchangeable and inflation-linked convertibles. An important aspect often missed by CB valuation models is the presence of negative convexity for extremely low share prices. As such a credit spread function dependent upon the underlying share price is introduced into the Tsiveriotis and Fernandes, and Hung and Wang models which improve upon the accuracy of the original models. Once a reliable model has been developed it becomes necessary to take advantage of convertible arbitrage trading strategies if they exist. The typical delta hedge, gamma hedge and option strategies that many convertible hedge funds employ are explained including the underlying risks with respect to the Greeks'. Copyright.
Download or read book Valuation of Convertible Bonds When Investors ACT Strategically written by Christian Koziol and published by . This book was released on 2004-03-30 with total page 224 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book New Evidence on Market Impact of Convertible Bond Issues on United States Firms written by Guillaume Gosselin and published by . This book was released on 2003 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book New Evidence on the Market Impact of Convertible Bond Issues in the U S written by Bala Arshanapalli and published by . This book was released on 2004 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study provides new evidence on the market impact of new issues of convertible bonds of U.S. listed firms. We examine on the market reaction surrounding the announcement dates and the issue dates of convertible bonds. The evidence suggests that firms experience negative abnormal returns around the announcement of new issues of convertible bonds. Abnormal returns are found to be a function of firm market value, price-to-book ratio, issue size, as well as the state of the overall market. Simulations using convertible arbitrage strategies suggests that investors could take advantage of these negative abnormal returns by going long on the firm's convertible bond and short on the firm's stock at the issue date.
Download or read book Convertible Bond Call Call Delay and the Value of Call Underwriting written by Charles Y. Mann and published by . This book was released on 1994 with total page 124 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book New Evidence on the Announcement Effect of Convertible and Exchangeable Bonds written by Manuel Ammann and published by . This book was released on 2016 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study investigates the announcement and issuance effects of offering convertible bonds and exchangeable bonds using data for the Swiss and German market during January 1996 and May 2003. The analysis shows that announcement effects of convertible bonds and exchangeable bonds are associated with significantly negative abnormal returns. Unlike previous studies, it also investigates the effect of the market return of the announcement effect and finds that the negative abnormal returns are significantly more pronounced when previous market returns have been negative. Furthermore, we analyze the relation between the announcement effects and equity components by controlling for the equity signal sent to the market. We find the size of the equity component of an issue to have a strong influence on the announcement effect for convertible but not for exchangeable securities and offer an explanation for this difference.
Download or read book Valuation and Optimal Strategies of Convertible Bonds written by Szu-Lang Liao and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a contingent claim valuation of a callable convertible bond with the issuer's credit risk. The optimal call, voluntary conversion and bankruptcy strategies are jointly determined by shareholders and bondholders to maximize the equity value and the bond value, respectively. Our model not only incorporates tax benefits, bankruptcy costs, refunding costs and a call notice period, but also takes account of the issuer's debt size and structure. The numerical results show that the predicted optimal call policies are generally consistent with recent empirical findings; therefore calling convertible bonds too late or too early can be rational.
Download or read book Valuation of Callable Convertible Bond With Parisian Feature Using Finite Element Method written by Pu Gong and published by . This book was released on 2007 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt: To protect the conversion privilege from being called away too soon, the bond indenture commonly contains hard call constraint and soft call constraint, which makes the valuation for the convertible bond more complicated. In this paper, a valuation model for a callable convertible bond with Parisian feature and notice period requirement is presented here using the arbitrage-free valuation method. Different from the existing works, we analyze the interaction between the optimal call policy and the optimal conversion policy based on the game theory analysis of options. Moreover, the finite element method is adopted to solving the pricing model and the projected successive over-relaxation technique is used to handling the American constraint. Finally, the convertible bond issued by China Merchants Bank is taken for an example to illustrate how the model works. Results show that notice period and Parisian feature have significant effect on the value of convertible bond and the optimal policies, and the so called quot;delayed callquot; phenomena has got some explanations here.
Download or read book Time Value Expropriation and Convertible Bonds Calls written by Emanuele Bajo and published by . This book was released on 2004 with total page 17 pages. Available in PDF, EPUB and Kindle. Book excerpt: Most of convertible bonds are issued with a callability provision. This allows the issuer to redeem the bond before the maturity date, when, doubtlessly, this is economically convenient for the firm. According to Ingersoll's theory, this condition occurs as soon as convertible value reaches call price. As Ingersoll and many others scholars afterward noticed, although this is the optimal behavior, generally firms delay calls until the bond price is, in average, more than 40% above the call price, giving so a unjustified gift to bondholders. In the last 20 years several possible explanations in the literature have been proposed.Looking at Italian experience, very few calls has been announced in the last years. To verify if this phenomenon can be considered as a strong inefficiency of Italian firms, I investigated a 14 years window, taking the whole universe of convertible bonds listed at Milan Stock Exchange from 1985 to 1998. In my sample of 85 convertible bond issues, I tested main existing theories, following a similar analysis conducted by Asquith (1995). However, a more complete explanation of call policies has been reached when we added in the analysis a new hypothesis: time value expropriation.
