- Valuation service
- Valuation tool via Excel Add-ins or GUI
- Data Analytic tool (vol calibration, curve construction, etc.)
- Market data service
- Integrated trading and risk management solution.
Four user interfaces:
- Data API offers programmatic access to the live and historical market data.
- Excel Add-ins provides spreadsheet based analytic tool.
- GUI provides visual interface to access all the services. Download GUI
- Analytic API uses StreamSocket to integrate with external applications.
Convertible Bond Definition and Valuation
FinPricing provides valuation models for the following convertible bonds:
- Convertible Bond
- Callable Convertible Bond
- Putable Convertible Bond
- Total Return Basket Swap
- Cancelable Reverse Convertible Bond
- Check FinPricing valuation models
All the equity models in FinPricing take volatility skew/smile and dividend into account.
|1. Convertible Bond Introduction|
A convertible bond has an embedded call option that gives bondholders the right to
convert their bonds into equity at a given time for a predetermined number of shares in the
issuing company. Whereas a reverse convertible bond has an embedded put option that gives
the issuer the right to convert the bond’s principal into shares of equity at a set
Convertible bonds typically have lower yields than the yields on similar fixed rate bonds without
the convertible option. Reverse convertible bonds usually have shorter terms to maturity and higher yields than most
other fixed rate bonds.
Most convertible bonds are subordinated debt of the issuer. In the event of bankruptcy, the claims of other
bondholders take priority over convertible bondholders, who themselves have priority over owners of the preferred
and common stock.
Issuers have several reasons to use convertible financing. By issuing convertibles they can lower their cost of
debt funding compared to straight debt alone. Lower-credit companies who may not be able to access the straight debt
market can often still issue convertible debt. Companies who anticipate equity appreciation can use convertibles to
defer equity financing to a time when growth has been achieved.
Investors find several features of convertibles appealing. They offer greater satiability of income than common
stock. They provide a yield that is often higher than the dividend yield of common stock. Finally, because they are
often theoretically underpriced, they may provide a cheap source of common stock volatility.
Convertible bonds are hybrid securities that have both debt and equity features. The valuation of convertible or
reverse convertible bonds can be quite complex because of its dual nature as a normal fixed rate bond
and as an equity call option or equity put option. There is
no closed-form solution for convertibles. Convertible prices can only be solved by numerical methods, such as, Monte
Carlo simulation, tree/lattice approaches, or partial differential equation (PDE) solutions.
Three sources of randomness exist in a convertible bond: the stock price, the interest rate, and the credit spread.
Interest rate is assumed to be constant as the effect of a stochastic interest rate on convertible bond prices is so
small that it can be neglected. Accurately modeling the equity process appears crucial. Since convertible bonds are
issued mainly by start-up or small companies (while more established firms rely on other means of financing),
credit risk plays an important role in the valuation. FinPricing uses PDE to price convertible
and reverse convertible bonds, and use Monte Carlo simulation to value convertibles with exotic path-dependent trigger
The value of the convertible at each node is divided into two components: a component of bond and a component of stock. The PDE of the equity component G is given by
The PDE of the bond component B is
The final conditions at maturity T can be generalized as
The upside constraints at time are
The valuation can be done via backward induction. The procedure is as follows.
For i = penultimateTime to currentTime
- Determine accrual interest and call/put prices.
- Determine boundary nodes
- use the PSOR (Projected Successive over Relaxation) method to obtain the continuation value of the fixed rate bond component B and the continuation value of the equity component G, applying the constraints
The value at node[y] is the convertible bond price where the equity price at node[y] is equal to the current
market stock price.
|4. More Details|
Click the following links for more details.
|6. Related Topics|