Convertible bonds: Pricing and structuring
A convertible bond is a hybrid security that not only retains most of the salient features of a debt instrument (such as a fixed coupon payment, priority over common stock when a company is in default, etc.), but also offers the upside potential associated with the underlying common stock.
Convertible bondholders can in fact, at their discretion, “convert” their debt instruments for a specifies number of shares of the company on expiration or any time before expiration as specified in the offer prospectus. The objective of this paper is to present a simple methodology that can be used to price convertible bonds, methodology that requires only some basics algebra knowledge.
Pricing and structuring of a convertible bond.
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