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The Journal of Derivatives

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Primary Article

Pricing Convertible Bonds Subject to Default Risk

Mao-Wei Hung and Jr-Yan Wang
The Journal of Derivatives Winter 2002, 10 (2) 75-87; DOI: https://doi.org/10.3905/jod.2002.319197
Mao-Wei Hung
With the College of Management at the National Taiwan University in Taipei, Taiwan.
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  • For correspondence: hung@mba.ntu.edu.tw
Jr-Yan Wang
With the College of Management at the National Taiwan University in Taipei, Taiwan.
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Abstract

Convertible bonds are commonplace securities, but valuing them properly is tricky. In addition to being exposed to interest rate risk like any bond in a stochastic interest rate environment, they contain both an option to convert them into shares of the issuing firm, and also exposure to the risk of default. In this article, Hung and Wang present a lattice technique that allows relatively straightforward valuation, even in the presence of these three sources of risk. After describing their technique in general, they put it to use to evaluate a convertible bond issued by Lucent.

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The Journal of Derivatives
Vol. 10, Issue 2
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Pricing Convertible Bonds Subject to Default Risk
Mao-Wei Hung, Jr-Yan Wang
The Journal of Derivatives Nov 2002, 10 (2) 75-87; DOI: 10.3905/jod.2002.319197

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Pricing Convertible Bonds Subject to Default Risk
Mao-Wei Hung, Jr-Yan Wang
The Journal of Derivatives Nov 2002, 10 (2) 75-87; DOI: 10.3905/jod.2002.319197
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