Comparing Three Convertible Debt Valuation Models

Abstract

In this article, I (a) describe and illustrate the implementation of three convertible debt valuation models, (b) show how their values for convertible debt respond to changes in the underlying valuation parameters, (c) examine the effects of changing each of the models such that the credit spread and the probability of default are not constant but vary inversely with the stock price, and (d) measure and compare the accuracy of each model when it is calibrated to convertible debt issuance prices and then used to forecast the convertible debt price one year later.