Hostname: page-component-78c5997874-mlc7c Total loading time: 0 Render date: 2024-11-15T05:44:27.509Z Has data issue: false hasContentIssue false
  • English
  • Français

An Estimate of Convertible Bond Premiums

Published online by Cambridge University Press:  19 October 2009

Edward H. Jennings
Get access Rights & Permissions [Opens in a new window]

Extract

A convertible bond is a hybrid financial instrument that incorporates features of a bond (fixed income security) and an equity claim (usually common stock). In most instances the convertible can be exchanged, at the holder's option, for the common shares of the corporation issuing the convertible. The conversion value, or stock value, is the market value of the common shares for which the convertible can be exchanged. The bond value or floor price is the market value of an equivalent bond that does not include a conversion feature. The market price of a convertible will be the conversion value or the bond value, whichever is higher, plus a premium. The purpose of this paper is to develop and test a model which estimates the premium. The premium estimated is defined as the difference between the market price of the convertible and the bond value or conversion value, whichever is larger. No consideration will be given to convertible preferreds.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 9 , Issue 1 , January 1974 , pp. 33 - 56
Copyright
Copyright © School of Business Administration, University of Washington 1974

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

[1]Baumol, William J.; Malkiol, Burton G.; and Quandt, Richard E.. “The Valuation of Convertible Securities.” Quarterly Journal of Economics, February 1966, pp. 48–59.CrossRefGoogle Scholar
[2]Bladen, Ashby. Techniques for Investing in Convertible Bonds. New York: Solomon Brothers and Hutzler, 1966.Google Scholar
[3]Blume, Marshall E. “Portfolio Theory: A Step Toward Its Application.” Journal of Business, April 1970, pp. 152–173.CrossRefGoogle Scholar
[4]Blume, Marshall E. “On the Assessment of Risk.” The Journal of Finance, March 1971, pp. 1–10.CrossRefGoogle Scholar
[5]Brigham, Eugene F. “An Analysis of Convertible Debentures: Theory and Some Empirical Evidence.” Journal of Finance, March 1966, pp. 35–54.Google Scholar
[6]Fama, Eugene F. “Risk, Return, and Equilibrium: Some Clarifying Comments.” The Journal of Finance, March 1968, pp. 29–40.CrossRefGoogle Scholar
[7]Fama, Eugene F. “Efficient Capital Markets: A Review of Theory and Empirical Work.” The Journal of Finance, May 1970, pp. 383–417.CrossRefGoogle Scholar
[8]Fisher, Lawrence, and Lorie, James. “Rates of Return on Investments in Common Stock: The Year–By–Year Record, 1926–65.” The Journal of Business, July 1968, pp. 1–26.Google Scholar
[9]Fisher, Lawrence, and Lorie, James. “Some New Stock-Market Indexes.” The Journal of Business, part 2 (January 1966), pp. 191–225.CrossRefGoogle Scholar
[10]Friend, Irwin, and Blume, Marshall. “Measurement of Portfolio Performance Under Uncertainty.” American Economic Review, September 1970, pp. 516–575.Google Scholar
[11]Jennings, Edward H. “An Empirical Analysis of Some Aspects of Common Stock Diversification.” Journal of Financial and Quantitative Analysis, March 1971, pp. 797–813.CrossRefGoogle Scholar
[12]Jensen, Michael C. “Risk, the Pricing of Capital Assets, and the Evaluation of Investment Portfolios.” Journal of Business, April 1969, pp. 167–247.CrossRefGoogle Scholar
[13]Jensen, Michael C. “The Performance of Mutual Funds in the Period 1945–64.” The Journal of Finance, May 1968, pp. 389–416.Google Scholar
[14]Kaplan, Stanley A. “Piercing the Corporate Boilerplate: Antidilution Clauses in Convertible Securities.” University of Chicago Law Review, Autumn 1965, pp. 1–30.CrossRefGoogle Scholar
[15]Kendall, Maurice G., and Stuart, Alan. The Advanced Theory of Statistics, 2nd ed., vol. 1. New York: Hafner Publishing Co., 1963.Google Scholar
[16]King, Benjamin F. “Market and Industry Factors in Stock Price Behavior.” Journal of Business, January 1966, pp. 139–190.CrossRefGoogle Scholar
[17]Lintner, John. “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets.” The Review of Economics and Statistics, February 1965, pp. 13–37.CrossRefGoogle Scholar
[18]Lintner, John. “Security Prices, Risk and Maximal Gains From Diversification.” The Journal of Finance, December 1965, pp. 587–615.Google Scholar
[19]Markowitz, Harry M. “Portfolio Selection.” The Journal of Finance, March 1952, pp. 77–91.Google Scholar
[20]Markowitz, Harry M.Portfolio Selection: Efficient Diversification of Investments. New York: John Wiley & Sons, 1959.Google Scholar
[21]Mossin, Jan. “Equilibrium in a Capital Asset Market.” Econometrica, October 1966, pp. 768–783.CrossRefGoogle Scholar
[22]Pilcher, James C.Raising Capital with Convertible Securities. Ann Arbor, Michigan: Bureau of Business Research, University of Michigan, 1955.Google Scholar
[23]Poensgen, Otto H. “The Valuation of Convertible Bonds,” parts 1 and 2. Industrial Management Review, Fall 1965 and Spring 1966, pp. 77–92 and 83–98.Google Scholar
[24]Sharpe, William F. “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk.” The Journal of Finance, September 1964, pp. 425–442.Google Scholar
[25]Sharpe, William F. “Risk Aversion in the Stock Market: Some Empirical Evidence.” The Journal of Finance, September 1965, pp. 416–422.Google Scholar
[26]Sharpe, William F. “Mutual Fund Performance.” Journal of Business, January 1966, pp. 119–138.CrossRefGoogle Scholar
[27]Sharpe, William F.Portfolio Theory and Capital Markets. Mew York: McGraw-Hill, 1970.Google Scholar
[28]Tobin, James. “Liquidity Preference as Behavior Towards Risk.” The Review of Economics and Statistics, February 1958, pp. 65–86.CrossRefGoogle Scholar
[29]Weil, Roman L. Jr.; Segall, Joel E.; and Green, David Jr. “Premiums on Convertible Bonds.” Journal of Finance, June 1968, pp. 445–463.CrossRefGoogle Scholar