Convertible Bond Prices and Inherent Biases (ABSTRACT)
Carayannopoulos, P., & Kalimipalli, M.
published: 2003 | Research publication | Refereed Journals - Finance
Carayannopoulos, P., & Kalimipalli, M. (2003). "Convertible Bond Prices and Inherent Biases". The Journal of Fixed Income, 13 (3), 64-74.
ABSTRACT: The objective is to examine the pricing behavior of corporate convertible bonds that are currently traded in the U.S. secondary convertible bond market. The results indicate that convertible bonds with relatively low conversion value are often underpriced to the extent that their prices regularly violate pricing bounds implied by the presence of the conversion option. For such bonds, the boundary condition associated with the bond's straight debt value is found to be often violated, and negative option prices are implied. The differences between actual and model prices for bonds with low conversion value are not the result of biases inherent in the pricing model used but are instead attributable to a systematic underpricing of these bonds in the marketplace. This finding should be of importance to corporate debt issuers and investors alike, in the wake of the tremendous growth in the convertible bond market.
revised Jan 12/05
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