Convertible Bond Markets

Transcription

1 Bibliography Acharya, S. and Handa, P. (1988) 'Early calls of convertible debt: new evidence and theory', New York University, Saloman Brothers Center for the Study of Financial Institutions, Working Paper (June). Aldred, P. (1987) 'Convertibles and warrants', London: Euromoney Publications. Armstrong, H.T. (1954) 'Stock option warrants - caveats for the speculator', The Analysts Journal (May). Bachelier, L. (1900) 'Theorie de la speculation', reprinted in Paul H. Cootner (ed.), The Random Character of Stock Market Prices (Cambridge, MA: MIT Press, 1967) Bierman, H. (1973) 'The cost of warrants', Journal of Financial and Quantitative Analysis (June), Bird, A.P. (1971) 'Evaluating warrants', The Investment Analyst (December). Black, F. (1975) 'Fact and fantasy in the use of options', Financial Analysts Journal, 31 (July-August), 36-41; (1976) 'The pricing of commodity contracts', Journal of Financial Economics, 3, Black, F. and Cox, J. (1976) 'Valuing corporate securities: some effects of bond indenture provisions', Journal of Finance, 31 (May), Black, F. and Scholes, M. (1972) 'The valuation of option contracts and a test of market efficiency', Journal of Finance, 27 (May), (1973) 'The pricing of options and corporate liabilities', Journal of Political Economy, 81, Black, F., Dermam, E. and Toy, W. (1990) 'A one-factor model of interest rates and its application to Treasury Bond options', Financial Analysts Journal, 46 (January February). Brennan, M. and Schwartz, E. (1977) 'Convertible bonds: valuation and optimal strategies for call and conversion', Journal of Finance, 32 (December), (1980) 'Analysing convertible bonds', Journal of Financial and Quantitative Analysis, 15 (November), (1986) 'The case for convertibles', Chase Financial Quarterly, 1, Calamos, J.P. (1988) Investing in Convertible Securities (London: Longman). Castanias, R., Chung, K. and Johnson, H. (1988) 'Dividend spreads', Journal of Business, 61, Chen, A.H.Y. (1970) 'A model of warrant pricing in a dynamic market', Journal of Finance, 25 (December),

2 Bibliography Connolly, K.B. and Philips, G.A. (1992) Japanese Warrant Markets (London: Macmillan). Constantinides, G. and Grundy, B. (1987) 'Call and conversion of convertible corporate bonds: theory and evidence', University of Chicago, Working Paper (January). Constantinides, G., and Rosenthal, R.W. (1984) 'Strategic analysis of the competitive exercise of certain financial options', Journal of Economic Theory, 32 (February). Cooper, I. (1988) 'The relationship between two methods of valuing convertible bonds', London Business School. Courtadon, G. and Merrick, J., Jr. (1983) 'The option pricing model and the valuation of corporate securities', Midland Corporate Finance Journal, I (Autumn), Cowan, A.R., Nandkumar, N. and Singh, A.K. (1990) 'Stock returns before and after calls of convertible bonds', Journal of Financial and Quantitative Analysis, 25, (1993) 'Calls and out of the money convertible bonds', Financial Management, 22, Cox, J., Ross, S. and Rubinstein, M. (1979) 'Option pricing: a simplified approach', Journal of Financial Economics, 7(3) (September), (1985) Options Markets (Englewood Cliffs, NJ: Prentice-Hall). Cretien, P.D. Jr., (1969) 'Convertible bond premiums as predictors of common stock price changes', Financial Analysts Journal (November-December), (1970) 'Convertible premiums vs. stock prices', Financial Analysts Journal, 25, Crouhy, M. and Galai, D. (l988) 'Warrant valuation and equity volatility', HEC, Paris. Curry, D.W. (1971) 'A comprehensive financial reporting method for convertible debt', The Accounting Review, 45, Dann, L.Y. and Mikkelson W.H. (1984) 'Convertible debt issuance, capital structure change and financing related information: some new evidence', Journal of Financial Economics, 13, Davidson, W.N. III, Glascock, J.L. and Won Jon Koh (1993) 'A test of the tax-induced leveraged hypothesis in convertible securities: a note', Journal of Business, Finance and Accounting, 20, Dawson, S.M. (1974) 'Timing interest payments for convertible bonds, Financial Management, 3, DeBerg, C.L. (1990) 'Earnings per share and actual conversion of convertible securities', Journal of Accounting Education, 8, Douglas, L.G. (1990) Bond Risk Analysis (New York: New York Institute of Finance). Dudley, L.W. and Schadler, F.P. (1994) 'Reporting the relative equity portion of convertible debt issues', Journal of Accounting, Auditing and Financing, 23, Dunn, K. and Eades, K. (1989) 'Voluntary conversion of convertible securities and the options call strategy', Journal of Financial Economics, 23, Duvell, D.T. (1970) 'Premiums on convertible bonds: comment', Journal of Finance, 25, Emery, D.R., Iskander-Datta, M.E. and Jong-Chul Rhim (1994) 'Capital structure management as a motivation for calling convertible debt', Journal of Financial Research, 17, Emmanuel, D. (l983a) 'Warrant valuation and exercise strategy', Journal of Financial Economics, 12 (August),

3 Convertible Bond Markets ---(1983b) 'A theoretical model for valuing preferred stock', Journal of Finance, 38 (September), Fernandez, P.A. (1993) 'An analysis of Spanish convertible bonds', Advances in Options and Futures Research, 5, Fields, L.P. and Mais, E.L. (1991) 'The valuation effects of private placements of convertible debt', Journal of Finance, 46, Figlewski, S. Silber, W.L. and Subrahmanyam, M.G. (1990) 'Financial options: from theory to practice', Stern, New York University. Frank, W.G. and Kroncke, C.O. (1974) 'Classifying conversions of convertible debentures over four years', Financial Management, 3, Frank, W.G. and Weygandt, J.J. (1970) 'Convertible debt and earnings per share: Pragmatism vs. good theory', The Accounting Review, 45, Fried, S. (1971) Speculating with Warrants (New York: RHM Associates). Galai, D. and Masulis, R.W. (1976) 'The option pricing model and the risk factor of stock', Journal of Financial Economics, 3 (January-March). Galai, D. and Schneller, M. (1978) 'Pricing warrants and the value of the firm', Journal of Finance, 33 (December), Gastineau, G. (1988) The Options Manual (New York: McGraw-Hili). Gaumnitz, B.R. and Thomson, J.E. (1987) 'Establishing the common stock equivalence of convertible bonds', The Accounting Review, 62, Gemmill, G. (1993) Options Pricing (New York: McGraw Hill International). Geske, R. (1977) 'The valuation of corporate liabilities as compound options', Journal of Financial and Quantitative Analysis, 12 (November), Giguere, G. (1958) 'Warrants: a mathematical model of evaluation', Analysts Journal (14 November). Green, R.C. (1984) 'Investment incentives, debt, and warrants', Journal of Financial Economics, 13, Hallis, J.S. (1976) 'Should companies issue warrants?', unpublished thesis, MIT (May). Harris, M. and Raviv, A. (1985) 'A sequential signalling model of convertible debt call policy', Journal of Finance, 40, Hilliard, E.J. and Leitch, R.A. (1977) 'Analysis of the warrant hedge in a stable paretian market', Journal of Financial and Quantitative Analysis (March), Ho, T.S.Y. and Lee, S.B. (1986) 'Term structure movements and pricing interest rate contingent claims', Journal of Finance (December), Ho, T.S.Y. and Singer, R. (1982) 'Bond indenture provisions and the risk of corporate debt', Journal of Financial Economics, 10 (December), Hsia, C-C. (1981) 'Optimal debt of a firm: an option pricing approach', Journal of Financial Research, 4 (Autumn), Hubbard, C.L. and Johnson, T. (1969) 'Writing calls with convertible bonds', 25, Hull, J. (1989) Options, Futures and Other Derivative Securities (Englewood Cliffs, NJ: Prentice-Hall). Ingersoll, J., Jr. (1977) 'An examination of convertible call policies on convertible securities', Journal of Finance, 32 (May), (1977) 'A contingent-claims valuation of convertible securities', Journal of Financial Economics, 4 (May),

4 Bibliography Jennings, E.H. (1974) 'An estimate of convertible bond premiums', Journal of Financial and Quantitative Analysis, I, (1975) 'Reply: An estimate of convertible bond premiums', Journal of Financial and Quantitative Analysis, 2, Jennergren, P. and Sorensson, T. (1991) 'On the choice of model in convertible valuation - a case study', Omega, 19, Kassouf, S.T. (1969a) Evaluation of Convertible Securities (New York: Analytic Publishers). --(1969b) 'An econometric model for option price with implications for investors' expectations and audacity', Econometrica, 17, Kim Yong-Cheol and Stulz, R.M. (1992) 'Is there a global market for convertible bonds', Journal of Business, 65, King, R.D. (1984) 'The effect of convertible bond equity values on dilution and leverage', The Accounting Review, 59, (1986) 'Convertible bond valuation: an empirical test', Journal of Financial Research, 9, Latane, H.A. and Rendleman, RJ., Jr. (1976) 'Standard deviations of stock price ratios implied in option prices', Journal of Finance, 31 (May), Lauterbach, B. and Schultz, P. (1990) 'Pricing warrants: an empirical study of the Black-Scholes model and its alternatives', Journal of Finance, 45(4), Leabo, D.A. and Rogalski, R. (1975) 'Warrant price movements and the efficient market model', Journal of Finance, 30 (March), Lee, C.J. (1981) 'The pricing of corporate debt: a note', Journal of Finance, 36 (December), Leibowitz, M.L. (1974) 'Understanding convertible securities', Financial Analysts Journal, 30, Lewis, C.M. (1991) 'Convertible debt: valuation and conversion in complex capital structures', Journal of Banking and Finance, 15, Lin, J.C. and Chen, K.C. (1991) 'Partially anticipated convertible calls', Financial Review, 26, Marshall, J.F. and Kapner, K.R. (1993a) Understanding Swaps (London: John Wiley). ---(1993b) The Swaps Market (London: Kolb Publishing). Mason, S.P. and Bhattacharya, S. (1981) 'Risky debt, jump processes, and safety covenants', Journal of Financial Economics, 9 (September), McMillan, L. (1986) Options as a Strategic Investment (New York: New York Institute of Finance). McGuire, S. (1990) Convertibles (Cambridge: Woodhead-Faulkner). Merton, R.C. (1975) 'On corporate debt: the risk structure of interest rates', Journal of Finance, 29 (March), (1973) 'Theory of rational option pricing', Bell Journal of Economics and Management Science, 4 (Spring), Mikkelson, W.H. (1981) 'Convertible calls and security returns', Journal of Financial Economics, 9, (1983) 'Capital structure change and decreases in stockholders' wealth: a cross-sectional study of convertible security calls', National Bureau of Economics Research, Working Paper,

5 Convertible Bond Markets Modigliani, F. and Miller, M. (1958) 'The cost of capital, corporation finance and the theory of investment', American Economic Review, 48 (June), Noreen, E. and Wolfson, M. (1981) 'Equilibrium warrant pricing models and accounting for executive stock options', Journal of Accounting Research, 19 (Autumn), Ofer, A.R. and Natarajan, A. (1987) 'Convertible call policies: an empirical analysis of an information-signalling hypothesis', Journal of Financial Economics 19, Parkinson, M. (1977) 'Option pricing: the American put', Journal of Business, 50 (January). Philips, G.A. (1988) Japanese Warrant Markets (London: IFR Publishing). Rush, D.F. and Melicher, R.W. (1974) 'An empirical examination of factors which influence warrant prices', Journal of Finance, 29 (December), Schulz, G. and Trautman, S. (1990) 'Valuation of warrants: theory and empirical tests for warrants written on German stocks', University of Stuttgart. Schwartz, E.S. (1977) 'The valuation of warrants: implementing a new approach', Journal of Financial Economics, 4 (January), Shelton, J.P. (1967) 'The relation of the pricing ofa warrant to the price of its associated common stock', Financial Analysts Journal, 23 (May-June and July-August), Singh, A.K. and Arnold, R.C. (1991) 'Underwritten calls of convertible bonds', Journal of Financial Economics, 29, Smith, C. (1976) 'Option pricing: a review', Journal of Financial Economics, 3 (January March), Spatt, C. and Sterbenz, F. (1988) 'Warrant exercise, dividends and reinvestment policy', Journal of Finance, 43, Stigum, M. (1981) Money Market Calculations: Yields, Break-Evens, and Arbitrage (Homewood, IL.: Dow Jones-Irwin). Thorp., E.O. and Kassouf, S.T. (1967) Beat the Market: A Scientific Stock Market System (New York: Random House). Vasicek, O.A. (1977) 'An equilibrium characterisation of the term structure', Journal of Financial Economics, 5 (November), Walter, J.E. and Que, A.V (1973) 'The valuation of convertible bonds', Journal of Finance, 28,

6 adjustments, hedge see hedge adjustments Altman, Edward 88 American options 4, 30-1 arbitrage cash/index arbitrage 124, 129, 130 Fujitsu minimum boundaries 5-11,38; payoff analysis 30-7 asset base 87 at the money options 31 backward induction 46 Banco de Galicia 15 Barings Bank I basis points 3 'basket' hedging see multivariate hedging beta binomial model 38-58, 104 allowing for dividends 57 bond tree 46-8 common embedded options 48-51; call provisions 48-50; forced conversion 50-I; put provisions 51 underlying equity tree 43-6 using to evaluate price varying parameters 52-7; delta 52-4; gamma 54; rho 56-7; vega 55, 56 Black, Fischer 38 'Black Monday' Bloomberg, L.P. 63,64, bond futures see futures bond tree 46-8 break-even II busted bond investors 14, 15 busted bonds 10, 15 call options 30-1, 39-42, 100 call price 49 call provisions 19,27,65 dilution forced conversion 50-1 pricing converts 48-9 callable stock 121 capital structure 90 'carry plays' 120 cash/index arbitrage 124, 129, 130 cheapest to deliver bond 71 Chicago Board of Trade 69 commodity prices 103 conditions and terms 2-5 conversion factor 71 conversion price (exercise price) 4,40, 50-1 conversion ratio 4-5 convertible bonds 1-17 global market investment value ('floor') 6-11 parity 5-6 spectrum 18, 19 terms and conditions 2-5 convertible financing altering life of loan 20-3 altering premium/coupon mix 23-6 exchangeable bonds 29 generic convertible bond 20 original issue discount note 27-9 put and call provisions 27 synthesising equity 23-6 convertible funds 15 convertible preferred stock 1-2 convexity

7 correlation between shares 123-4, 129 cost of carry 37, 68 long volatility 107-9, 117, multivariate hedging 131 coupon 2, 3,19, 60, 102 altering premium/coupon mix 23-6 current yield II and duration 65 pricing coupon paying converts 35-7 see also zero coupon convertible bonds Cox, J , 38, 88-90, 100 credit-adjusted interest rate 46-8,49, 90 credit-adjusted spread 90-4, 102 credit rating 3, and bond yields 88, 89 and default rates 88, 90 credit rating agencies 86-7 credit risk see default risk Cresvale International Asset Management 131, 132 'crisis at maturity theory' 90 cum warrants 12,34,35 current yield II debt, straight 1, 10, 1\, 29 original issue discount notes 29 see also fixed income debt/equity ratio 87, 90 see also leverage default premiums default rates 88, 90 default risk (credit risk) 7-8, 59, 86-94, 102, 133 default premiums implied spread 91 role of credit rating agencies 86-7 sensitivity to changes in theoretical spreads 91-4 and straight bond equivalent 91 delta (hedge) ratio 40-2, 48, 67 adjustments to multivariate hedge bond price and changing share price 52-4 duration-based hedge ratio 72 gamma 54 theoretical spreads and 92-4 trading volatility 107-9; Fujitsu 113, 114, 115, 117, 119 dilution 5, 18,20, discounted parity 33-5, 36, 37 'distressed exchanges' 86 diversified portfolio 120 dividends 57 dominance, portfolio 30-1, 39, duration 62-6, 72 earnings per share 87 embedded options 2, IS, 27, 48-51, 59 see also call provisions; put provisions Emmanuel, D. 101 equity I, 11, 13,29 synthesising 9-11, 15, 19,23, 131 underlying equity tree 43-6, 57 see also share prices equity investors 14, 15 error random error tracking error Eurobond market 16 Eurodisney 92 European options 4, 30-1 exchange rate 5 exchangeable convertible bonds 2, 29 exercise price 4,40, 50-1 expectations theory 60-1, 62 expected returns (ER) tracking error 129, 130 trading volatility and 'fallen angels' IS, 86-7 fat-tailed distribution 104 Figlewski, S. 100 finance, access to financial crises I financing, convertible see convertible financing five year (straight) bond 76-7, 83 fixed income 10, II, 19, 29, 91 interest rate risk and straight bonds synthesising 12-13, 109 see also debt, straight fixed income investors 12-13, 14 flexibility 133 'floor' see investment value 'floor to put' 51 Fokker 7,92 forced conversion 50-1 Fujitsu

8 futures and hedging interest rate risk multivariate hedging Galai, D. 100 gamma 54, 109, 110 Gemmill, G. 100, 103 generic convertible bond 19,20 global convertible bond market Global Depository Receipts (GDRs) 'hard non-call' protection 49 hedge adjustments 104 multivariate hedging trading volatility 107-9, 114, hedge investors hedge ratio see delta hedging 95 futures and interest rate risk multivariate see multivariate hedging trading volatility and market neutral hedging 106-9; Fujitsu high premium/high coupon CB 19 Ho, T.S.Y. 102 implied spread 91 implied volatility in the money converts 23, 52, 57, 66, 68,92 in the money options 31, income flows 109 indenture 5 individual options vs an index option information inefficiencies interest rates 35-7, 59-85, 102 binomial pricing model 44-8 credit-adjusted 46-8,49,90 duration 62-6 expectations 60-1 liquidity preference theory 60 rho 56-7 risk 66; and convertible bonds 66-9; hedging risk with futures 69-72; price/yield relationships and price risk 73-85; and straight bonds 59-60; and trading volatility 107-9, segmentation theory 61 International Securities Market Association (ISMA) 16 intrinsic value see parity investment grade 86-7 investment value ('floor') 6-11,20 parity/floorratio (S/IV) 11,20,23,29 investors 18 risk spectrum issuance 2-5 see also new issues Italy 29 Japan 12, 50-1, 103 Japan Bond Rating Agency 86 Japanese Government Bond (JOB) 112, 113, 115, 116 JCR 86 'junk' bonds 7, 87 kappa (vega) 55, 56 Keystone funds 91-2 lambda (vega) 55, 56 lead managers 3 Lee, S.B. 102 leptokurtosis 104 leverage 13, 87, 90 multivariate hedging trading volatility 117, liquidity 16, 133 liquidity preference theory 60, 61 logged returns lognormal distribution of stock returns 104 London Interbank Offer Rate (LIBOR) 112, 113 long volatility see volatility low premium/low coupon CB 19 Macauley's duration 62, 65 Malaysia 29 mandatory convertible bonds 19 margin requirement market inefficiencies market neutral hedging 95, 106-9, 122 Fujitsu maturity 65 crisis at maturity theory 90 extending 20-3 price/yield relationships and price risk 66,

9 mean reversion 103 memorandum, offering 5 Merton, Robert 38, 39, Metallgesellschaft 1 Microsoft , 128 Mikuni 86, 112 minimum arbitrage boundaries 5-11,38 payoff analysis 30-7 modified duration 65 Moody's Investors Service 86, 87, 88 multi-factor analysis 102 multiplicative binomial process 43 multivariate hedging advantages and disadvantages portfolio of individual options vs an index option portfolio selection and derivatives tracking error Nankai Electric Railway 101 new issues Newton-Raphson iterative procedure 105 Nikkei 225; stock index 123 nominal value 3 non-diversifiable risk 88 normal distribution 104 'Northwest' shifts number of issues 129, 130 see also multivariate hedging offering memorandum 5 oil price 103 omicron 92-4 one-year (straight) bond 74-5, 82 operating risk 90 options American and European 4,30-1 embedded see embedded options portfolio of individual vs an index option Orange County 1 original issue discount (OlD) notes 19,27-9 out of the money converts 52, 56-7, 66, 68, 91, 92 out of the money options 31, outright convertible investors 14, 15 over the counter (OTC) convertible bond markets 16 par value 3 parity (intrinsic value) 5-6, 8,33, 37 discounted 33-5, 36, 37 forced conversion 50-I terminal value 31 parity/floor ratio (S/IV) II, 20, 23, 29 payoff analysis 30-7 coupon paying converts 35-7 zero coupon convertible bond 32-5 Peugeot Citroen 128 Polly Peck 7,92 portfolio diversification 120 portfolio dominance 30-1,39, portfolio of options portfolio selection premium 9-11, 19 altering premium/coupon mix 23-6 cost of carry and 119 premium compression 106, 109, 110 premium redemption bonds 3 present value 30, 32-7 price relatives 96 price/yield curves 60-6 and price risk pricing/prices 3, 38-58, 114 binomial model see binomial model coupon paying converts 35-7 fair price 38-9 futures and interest rate risk impact of varying volatilities 55, 56, 96 implied volatility information inefficiencies interest rate risk and 66-9 straight bonds 60 trading volatility zero coupon convertible bonds 32-5 see also payoff analysis; present value principal value 3 probability of conversion 101 profit/loss profile Cresvale 131, 132 Fujitsu III, 112, 118, 120 and trading volatility prospectus 5 'pulled to the money' 101 put provisions 3, 19 impact on financing 27, 28 pricing and 51 put price

10 random error 'ratcheting' profits 108, 109 rational investors 12 recalled blocks of shares 133 'red herring' 5 returns expected see expected returns lognormal distribution 104 volatility rho 56-7,65-6, 67, 68, 70 risk credit/default see default risk expected returns and interest rate risk see interest rates risk-free debt 12, 13 risk premium 87,88 Rubinstein, M ,38,88-90, 100 Schneller, M. 100 Scholes, Myron 38 segmentation theory 61 share prices 8, 40 parity and 5-6 theoretical spreads and default risk 92-4 varying and binomial pricing model 52-7 volatility 45-6,95-100, 103-4; dilution 101; Fujitsu see also equity sinking fund provisions 65 'soft call' 49 South African Government yield curve 61,64 speculative grade 86-7,90 spread, credit adjusted 90-4, 102 Standard & Poors (S&P) 86, 87 stochastic dominance argument 39 stock market crashes 103 straight bonds equivalents 6-7, 20, 47, 91 interest rate risk and 59-66; price/yield relationship 66, terms and conditions 2 straight debt see debt, straight; fixed income strike price (exercise price) 4, 40, 50-1 Subrahmanyam, M.G. 100 Sumitomo Corporation I swap market 91 synthesising equity 9-11, 15, 19,23, 131 synthesising fixed income 12-13, 109 synthetic convertible bonds 12, 34, 35 systematic risk 88 Telefonos de Mexico 127 ten-year (straight) bond 78-9, 84 term structure 60-6 terminal value 31, 32 see also pricing/prices terms and conditions 2-5 theoretical spread 90-4, 102 Tokyo stock market crash tracking error Treasury Bond futures Treasury bonds 65 yield curve 61,63 Treasury Note (T-Note) Futures 69 trigger price 49 twenty-year (straight) bond 80-1, 85 underlying equity tree 43-6, 57 univariate hedging see market neutral hedging 'usable' bonds 34 vega 55, 56 volatility Fujitsu implied volatility long , 131 meaning premium compression 109, 110 problems and practical issues 100-4; dilution 100-1; known and constant volatility 102-4; lognormal distribution of stock returns 104; multi-factor analysis 102; theoretical spread 102 trading volatility and market neutral hedging underlying equity tree 45-6 vega 55, S6 143

11 warrant investors 14, 15 warrants 15, 30, 59, cum warrants 12, 34, 35 Wharf Holdings 127 yield 3, 65, 87-8 credit rating and 88, 89 current 11 price/yield curves see price/yield curves yield advantage 11 see also payoff analysis yield curves 60-6, 115, 117 'yield to put' 51 zero coupon convertible bonds 32-5,65 144