Analyzing interactive call, default, and conversion policies for corporate bonds

Abstract

This paper studies the timings of interactive call and conversion decisions made by bond issuers and holders, respectively, due to the presence of different embedded options. We develop a risk-neutral-valuation-based game option model featuring bondholder-stockholder conflicts of interest. The presence of conversion (call) options possessed by the bondholders (issuers) accelerates the call (conversion) decisions. Granting bondholders additional put options further hastens call decisions and hence conversion decisions in response to call accelerations. Our empirical studies are consistent with past call policy research and support our interactive exercise analyses that explain the rationales behind early call and conversion phenomena.

Option features and price discovery in convertible bonds

“…Options contain information about the future underlying price, which makes the options market useful for price discovery and more information efficiency (Lee et al, 2022). However, convertible bonds are often ignored as a financial instrument that has both option and bond attributes (Lau & Kwok, 2004; L. C. Liu et al, 2022). Thus, the question arises as to whether convertible bonds with option attributes also have price discovery functions.…”