Pricing a Convertible Bond Using The Black-Scholes Model: An Example. Convertible bonds are issued either at a premium or at a specified conversion ratio. The SPDR Barclays Capital Convertible Bond ETF is the most popular mainstream (read: widely marketed) vehicle to purchase convertibles. This paper is relevant as one step in the process of structuring a Solvency II optimized portfolio (which will be treated in separate publications) as investors and regulators are likely to require a properly tested asset pricing model. Hazard rate calibrated from CDS spreads or specified. A convertible bond is a type of debt security that can be converted into a predetermined amount of the underlying company's equity at certain times during the bond's life, usually at the discretion of the bondholder. In addition to price performance, the 3-month return assumes the reinvestment of all dividends during the last 3 months. If TSJ's stock was trading at $40 at the time of the convertible bonds issue, investors would have the option of converting those bonds for shares at a price of $50—$40 x 1.25 = $50.

In this installment… Hazard rate and credit spread models. As the underlying share price increases, the bond …

In order to price a convertible bond using the Black-Scholes model, the following two steps would need to be taken: calculate the investment value of the bond. On a market capitalisation basis, the Focus Index encompasses $143 billion of the total global convertible bond universe, whilst the Qualified Index captures a more representative This would force the price of the convertible above the bond value and its market price should be above $200 since it would have a higher yield than the common shares.

Convertible bonds can also be issued with other embedded features such as time varying issuer calls and investor puts. A convertible bond (or preferred share) is a hybrid security, part debt and part equity.

Note that this formula is an identity, so any one variable can be solved for if the other variables are known. For example, a company with a stock trading at $40 may issue a convertible bond with a 25% premium. In a previous post, we presented a theoretical framework for pricing convertible bonds and preferred shares. The number of shares one receives for each bond and the price one pays for those shares are determined when the convertible bond is issued. Convertible and all other type of bonds are ranked based on their AUM-weighted average 3-month return for all the U.S.-listed ETFs that are classified by ETFdb.com as being mostly exposed to those respective bonds. The stock component rises and falls along with the share price of the company's common stock. Convertible bonds act like regular corporate bonds when issued.

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