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

Liang Chih Liu; Tian Shyr Dai; Lei Zhou; Hao Han Chang

doi:10.1002/fut.22359

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

Liang Chih Liu^*, Tian Shyr Dai, Lei Zhou, Hao Han Chang

^*Corresponding author for this work

Department of Information Management and Finance

Research output: Contribution to journal › Article › peer-review

1 Scopus citations

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.

Original language	English
Pages (from-to)	1597-1638
Number of pages	42
Journal	Journal of Futures Markets
Volume	42
Issue number	8
DOIs	https://doi.org/10.1002/fut.22359
State	Published - Aug 2022

Keywords

call policy
conversion policy
corporate bond with embedded options
game option
risk-neutral valuation

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10.1002/fut.22359

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title = "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.",

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AB - 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.

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KW - risk-neutral valuation

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

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