Valuation and optimal strategies of convertible bonds

Szu Lang Liao*, Hsing-Hua Huang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

8 Scopus citations


This article presents a contingent claim valuation of a callable convertible bond with the issuer's credit risk. The optimal call, voluntary conversion, and bankruptcy strategies are jointly determined by shareholders and bondholders to maximize the equity value and the bond value, respectively. This model not only incorporates tax benefits, bankruptcy costs, refunding costs, and a call notice period, but also takes account of the issuer's debt size and structure. The numerical results show that the predicted optimal call policies are generally consistent with recent empirical findings; therefore, calling convertible bonds too late or too early can be rational.

Original languageEnglish
Pages (from-to)895-922
Number of pages28
JournalJournal of Futures Markets
Issue number9
StatePublished - 1 Sep 2006

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