Pricing Convertible Bonds Subject to Default Risk
Journal
Journal of Derivatives
Journal Volume
10
Journal Issue
2
Pages
75-87
Date Issued
2002
Date
2002
Author(s)
Abstract
This article provides a new method to price convertible bonds that are subject to default risk. As some convertible bonds do not convert, we should price them using a risky discount rate in order to reflect the future default probability. Once the bonds are converted into shares of stock, it is appropriate to use the risk-free interest rate as the discount rate. We carefully distinguish the risky discount rate from the risk-free interest rate, and take into account the stochastic characteristics of the two discount processes.
Type
journal article