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by Matthew Bailey Greenberg, Ng Hin Wah. / Thesis (M.B.A.)--Chinese University of Hong Kong, 1998. / Includes bibliographical references (leaves 61-62). / ABSTRACT --- p.ii / TABLE OF CONTENTS --- p.iv / Chapter / Chapter I. --- INTRODUCTION --- p.1 / Chapter II. --- CONVERTIBLE BONDS AND WARRANTS --- p.3 / ConvertIBle Bonds --- p.3 / Value At Maturity --- p.5 / Value Before Maturity --- p.6 / Warrants --- p.8 / The Difference Between Convertible Bonds and Warrants --- p.11 / Considerations of Issuing Convertibles and Bond with Warrants --- p.13 / Valuation of Convertible Bond --- p.15 / Valuation of Warrants --- p.18 / Chapter III. --- CALLABLE BONDS --- p.20 / Performance Characteristics of Callable Bonds --- p.21 / Valuation of a Two-year Callable Bond with the Salomon Brothers Model --- p.22 / Valuation of a Three-year Callable Bond with the Salomon Brothers Model --- p.25 / Step1: Determination of ru and rd --- p.27 / "Step 2: Determination of ruu, rud and rdd " --- p.28 / "Black, Derman & Toy Model (BDT) " --- p.30 / Step 1: Determination of ru and rd --- p.31 / "Step 2: Determination of ruu, rud and rdd " --- p.32 / Chapter IV. --- SINKING-FUND BONDS --- p.37 / Advantages for the Investor --- p.38 / Disadvantages for the Investor --- p.38 / Methods Used by Issuers for Early Bond Redemption --- p.39 / Valuation of Non-callable Sinking Fund Bonds --- p.40 / Valuation of Callable Sinking Fund Bond --- p.45 / Chapter V. --- VALUATION OF A CALLABLE BOND BY A COMPUTERIZED PROGRAM… --- p.47 / System requirements --- p.48 / Opening the program file --- p.48 / Manual for using the program --- p.48 / Construction of Interest Rate Tree --- p.48 / Valuation of a Callable Bond --- p.50 / APPENDIX --- p.55 / BIBLIOGRAPHY --- p.61

本研究主要著重信用風險對於可轉換公司債評價之影響。因可轉換公司債兼具股權與債權之特性，使得它在某些時候亦與一般債權一樣面臨公司無法完全清償的風險。本文的研究架構主要分為兩項：以公司資產價值及以普通股股價為可轉換公司債之標的資產，並將信用風險的設定融入模型之中。在實證部份，則以茂矽二與新纖二這兩檔可轉換公司債為樣本。當以公司價值做為標的時，可再區分為Merton模型的設定或是首次通過時間模型(First Passage Time Model)的設定，此二者並無明顯的差異，主要原因來自於可轉換公司債同時具有債券及股票的性質，公司提前破產與否對可轉換公司債的影響並不大。此外，當以公司普通股股價做為標的時，可再分為以信用價差(credit spread)與Jarrow and Turnbull (1995)來評價其價值，此時，需將不同的信用品質分離出來，給予不同的折現率，當股價處於深度價外時，可轉換公司債對信用風險的敏感度較高。若再以理論價值與市價做比較，則可發現無論是茂矽二或新纖二的理論價值皆高於市價，其中一部份來自於模型設定已將部份發行條款予以簡化所造成的誤差，更重要的原因乃是可轉換公司債的市場流動性不足，造成效率性低落所導致。

The thesis presents three studies that focus on the wealth effects of hybrid securities namely: convertible bonds and warrant-bonds. The wealth effects of these hybrid securities are investigated through both meta-analysis and event-studies. Chapter 2 incorporates a review of the literature on wealth effects associated with the announcement of convertible bonds and warrant-bond loans. The findings of 35 event studies, which include 84 sub-samples and 6,310 announcements, are analysed using meta-analysis. A mean cumulative abnormal return of 1.14% for convertible bonds compared with 0.02% for warrant-bonds are observed, the significant difference confirming a relative advantage for warrant-bonds. Abnormal returns for hybrid securities issued in the United States are significantly more negative than for those issued in other countries. In addition, issuing hybrid securities to refund debt does not seem to be favoured by investors. Finally, several factors identified as important by theory or in prior research are not significant within the cross-study models, suggesting that more evidence is needed to confirm whether they are robust. Chapter 3 presents a study that examines the market reaction to hybrid security announcements in an emerging country, specifically Malaysia, from January 1996 to December 2009. The results indicate that announcements of the intention to issue convertible bonds in Malaysia are associated with significantly negative abnormal returns of 1.10% (significant at the 10% level) on the event window of (-1, 1). On the other hand, announcements of the intention to issue warrant-bonds document significantly positive abnormal returns of 2.25% (significant at the 10% level) on the same event window. The ‘univariate’ test confirms that the wealth effects associated with the announcement of the intention to issue warrant-bonds is larger (i.e., more positive) than convertible bonds in line with few studies in different markets: Japan (Kang, Kim, Park, and Stulz, 1995), the Netherlands (De Roon and Veld, 1998), and German (Gebhardt, 2001). Non-significant abnormal returns of 0.81% and 0.23% on the event window ( 1, 1) are reported for announcements of hybrid securities by means of private placements and rights offerings, respectively, contradict with the ‘certification hypothesis’ of Hertzel and Smith (1993), and ‘signalling hypothesis’ of Heinkel and Schwartz (1986). This chapter also finds that there is no support for ‘information-signalling’ hypothesis (Ross, 1977), as non-significant abnormal returns are observed in the event window ( 1, 1) for announcements of hybrid securities for all purposes of offering (i.e., debt restructuring, mergers and acquisitions, capital expenditure, and working capital). These findings also highlight that listed firms in Malaysia with high risk uncertainty contribute to more negative abnormal returns in comparison to lower risk uncertainty firms, which contradicts with the ‘risk uncertainty hypothesis’. The final study presented in this thesis, Chapter 4, considers the wealth effects of hybrid security announcements in a developed country, the United Kingdom. This third study investigates the wealth effects of announcements of the intention to issue convertible bonds in the UK market over a period from January 1990 until July 2010. The study period also allows for an investigation on the market reaction to announcements of convertible bonds during the financial crisis that started in August 2007. Using the standard event study methodology, a negative abnormal return of 1.75% (significant at the 5% level) on the two-day event window is reported, confirming the findings of previous UK studies (Abyhankar and Dunning, 1999, and Wolf et al., 1999) which are also in line with studies performed using data from other countries such as US, Canada, Australia, and others. There are no significant differences between the results of the sub-samples before and during the financial crisis, suggesting that the economic conditions do not influence the market response. The results of the event study and the multivariate analysis in this chapter are consistent with the ‘market timing hypothesis’ implying that managers in the UK announce their intention to issue convertible bonds after a period of good stock price performance.

Contingent convertible bonds are hybrid capital instruments, contingent on some form of indicator of financial distress of the issuing bank. Following the financial crisis, these instruments are proposed as a solution to the moral hazard issue of banks too big to fail. With the increased capital requirements of the Basel III directive, contingent capital enables banks to increase their capitalization without issuing expensive equity. Also, in times of historically low interest rates, these instruments might be interesting for investors in search of higher yields, as well as long term investors wanting to implement countercyclical investment strategies. However, due to the high complexity of these instruments, valuation has proven diffcult. The purpose of this thesis is to value instruments contingent on the bank's common equity tier 1 to risk-weighted assets ratio. We build our model upon the work of Glasserman & Nouri (2012), and extend it to include contingency on risk-weighted assets, instant non-continuous conversion to equity, and a combination of fixed imposed loss and fixed conversion price as terms of conversion. We use a capital structure model in continuous time to define asset dynamics, asset claims and the event of conversion and liquidation of the bank. Thereafter we use two important results from Glasserman & Nouri (2012) to value the discounted cash flows to holders of debt and contingent debt. From this, we arrive at closed form solutions for the coupon rates of these securities. / Contingent convertible bonds (villkoradeobligationer) är hybrida kapitalinstrument som beror på någon form av indikator på finansiell instabilitet i den emitterande banken. Efter finanskrisen har dessa finansiella produkter föreslagits som en lösning på dilemmat som uppstår när banker är för stora för att låtas gå omkull. Villkorade obligationer är en väg för banker att ta in kapital och uppfylla de ökade kapitalkrav som ställs av direktiven i Basel III utan att emittera kostsamt aktiekapital. I dessa tider av historiskt låga räntesatser är den relativt höga avkastning, tillsammans med de kontracykliska effekter produkterna ger dessutom intressanta för många investerare. Att värdera dessa produkter har dock visat sig svårt då de är mycket komplexa. Syftet med denna uppsats är att värdera villkorade obligationer som beror på relationen mellan bankens kärnprimärkapital och riskviktade tillgångar. Vi använder omvandling till aktiekapital som förlustabsorberingsmekanism och använder en kombination av fixerade konverteringspris och fixerade ålagda förluster som villkor för konversion. Vi använder en kapitalstrukturell modell i kontinuerlig tid för att definiera tillgångarnas rörelser, fordringar på tillgångarna och händelsen av konversion av kontraktet eller likvideringen av banken. Därefter använder vi två viktiga resultat från Glasserman & Nouri (2012) för att värdera de diskonterade kassaflöden till ägaren av obligationer och villkorade obligationer. Från detta hittar vi analytiska lösningar för storleken av kupongräntorna på obligationerna, villkorade som normala.

A convertible bond (CB) is a financial derivative, a so called hybrid security. It is an issued contract from a company or a government, which is paid for up-front. The contract yields a known amount at the specified maturity date, unless the holder chooses to convert it into an amount of the underlying asset. This kind of financial products can have complex features affecting the contract price and the optimal exercising situation. The partial differential equation (PDE) approach used for pricing financial derivatives makes it possible to describe convertible bonds with a physical model, a reversed diffusion described by a parabolic PDE. One can sometimes find both analytical and numerical solutions for this type of PDEs and interpret the solutions from a financial point of view, as they suggest predictable behaviour of the contract price.

The conflict that may arise among holders of competing claims on firms' assets is being studied under the heading of "agency theory." The primary purposes of the research done in this study were to: (1) economically model the individual investor's consumption-investment decision as it is modified by the agency problem, and (2) to econometrically model the firm's decision to issue convertible versus nonconvertible bonds using explanatory variables which measure the extent of the agency problem. Individual investors are assumed to maximize expected utility of consumption by choosing consumption and investment amounts over a single period. A mathematical model of the investor's consumption-investment decision was derived in an environment characterized by agency problems between stockholders and bondholders. It was demonstrated that if the capital markets exhibit conditions known as spanning and competitivity, then the only investors affected by the agency problem are those holding the affected securities prior to the act of expropriation. It was also shown that the agency problem does not vanish in general, even if investors attempt to avoid the expropriation by holding balanced portions of all outstanding claims on a firm's assets. Implications of the theoretical development were then tested by econometrically modelling the firm's choice of convertible versus nonconvertible debt. The explanatory variables included in the model included measures of the more popular reasons for convertible financing, such as the "debt sweetener" hypothesis and the "delayed equity" rationale discussed in most basic finance textbooks. In addition, measures of agency costs were included, since one possible solution to the agency problem is the issuance of convertible bonds. The empirical results showed that the model accounted for a significant portion of the discrimination between convertible and straight debt, and that the variables designed to measure agency costs were marginally significant. / Ph. D.

Les recherches menées dans cette thèse se sont intéressées à l'étude des obligations convertibles (OC) sous différents angles : le premier essai analyse les motivations des dirigeants à émettre des OC. Nous avons proposé un questionnaire qui a été envoyé à des entreprises françaises et nous avons conclu que les émissions d'OC ont principalement pour objectif de réaliser une augmentation de capital différée, émettre un signal, payer un coupon moins élevé, éviter la dilution et diversifier les sources de financement. Ensuite, à travers une ACP, nous avons identifié trois groupes d'émetteurs: les entreprises motivées par les avantages que peut procurer une émission d'OC par rapport à une augmentation de capital ; les entreprises qui souhaitent s'endetter à moindre coût ; et les entreprises intéressées par la souplesse des OC pour effectuer un financement séquentiel. Dès lors que la décision d'émettre des convertibles est prise, le manager doit décider du design de son obligation. Dans le deuxième essai, nous avons cherché à identifier et analyser les facteurs qui influencent la structure de l'OC, mesurée par la proportion de fonds propres et de dette dans l'actif émis. Nous avons montré que le risque de sous-investissement, la performance opérationnelle future, le niveau de l'endettement et la concentration de l'actionnariat influencent la structure de l'OC. Dans le troisième essai, nous avons analysé l'effet du risque de défaut et de conversion sur la sensibilité de l'OC aux variations du taux d'intérêt, mesurée par sa duration. Nous avons montré que le risque de défaut et de conversion ont un effet négatif sur la duration pour la plupart des convertibles. / This thesis have focused on the study of convertible bonds (CB) from different angles: The first essay analyzes the motivations of firms to issue OC . We proposed a questionnaire that was sent to French companies and concluded that emissions of OC mainly aim to make a back-door equity increase, issue a signal, pay a lower coupon, avoid dilution and diversify financing sources. Then, through a principal component analysis, we identified three groups of issuers : companies motivated by the benefits of an OC issue compared to a capital increase; companies wishing to borrow at lower cost ; and companies interested in the flexibility of the OC to perform a sequential financing. Once the decision to issue convertible is taken, the manager have to decide the design of its bond. In the second study, we have identified and analyzed the factors that influence the structure of the OC, measured by the proportion of equity and debt. We have shown that the risk of underinvestment, future operating performance, the level of debt and the ownership concentration influence the structure of the OC. In the third essay, we analyzed the effect of default and conversion risks on the sensitivity of the OC to interest rates changes, as measured by its duration. We have shown that the risk of default and conversion have a negative effect on the duration for most convertible bonds.

Ever since the great financial crisis of 2008 regulators have pushed toward more resilient banks, resulting in more demanding regulation and an increase of regulator’s insight and power. Through the revision of the BASEL framework, Contingent Convertible Bonds were introduced in 2010 as a part of regulatory capital and has since then grown increasingly popular. However, these instruments have never been tested in a stressed European financial system. Hence, there is no genuine information of how these instruments would behave. Neither have there been any published efforts in testing this through simulation, to the best of my knowledge. Using a temporally disaggregated augmentation of the EBA 2016 stress test, I simulate how the financial system would be affected by triggering the CoCos. Studying the implications of both low and high trigger instruments. Results indicate that there are low risks for a systemic fallout and showcases some notable differences as a result of CoCo design and type of trigger.

Since 1980, many convertible bonds have been issued by Swedish companies. Most of these issues have been aimed at the employees. The great number of these employee issues gave rise to a new tax law. This tax law made it necessary to obtain a value on a convertible bond certificate at issue. In the first part of the dissertation, the institutional setting for the issuing of convertible bonds in Sweden is discussed. The relevant tax laws and recommendations given by different organizations are described. Also other features related to the issues are described. Furthermore, an empirical study of convertible bonds issues to emplyees in listed companies is carried out. The main purpose of the study is to quantify the volume of convertible bond issues to employees which have defaulted. Issues with a nominal value of around 500 million Swedish Crowns have been involved in some form of default. In this study, several models are compared to investigate whether the choice of model for valuing convertible bonds is important. These models all fall within the framework of Contingent Claims Analysis. Contingent Claims Analysis is an option based technique for determining the value of a claim whose payoffs depend upon the development of one or several underlying variables. In the study, it is shown in great detail how to set up and use those models. It is shown that the choice of model is important for the value of a convertible bond in certain situations. Those situations are identified by an empirical study of Swedish convertible bonds and through sensitivity analysis. / <p>Diss. Stockholm : Handelshögskolan, 1993</p>