| In the first part of this paper we provide a critical review of the academic literature on convertible bond pricing and valuation over the last 40 years. Specific topics include theoretical valuation methods, optimal option exercise policies, empirical research and event studies. Chapter two presents a modified Cox-Ross-Rubinstein binomial model incorporating credit risk to value convertible bonds. In Chapter three, we employ this model to investigate whether initial offerings of convertible bonds are underpriced. Using a sample of 63 offerings of convertible bonds between 1994 and 1997, we find average underpricing of 2.18%. The equity beta, size of the coupon, and percentage potential dilution are found to have significant explanatory power. |
