In a previous post, we presented a theoretical framework for pricing convertible bonds and preferred shares. We also provided an example of pricing a convertible bond in Excel. In this installment, we present an example of pricing a convertible bond in Python.
Recall that a convertible bond (or preferred share) is a hybrid security, part debt, and part equity. Its valuation is derived from both the level of interest rates and the price of the underlying equity. Several convertible bond pricing approaches are available to value these complex hybrid securities such as Binomial Tree, Partial Differential Equation and Monte Carlo simulation. One of the earliest approaches was the Binomial Tree model originally developed by Goldman Sachs and this model allows for an efficient implementation with high accuracy. The Binomial Tree model is flexible enough to support the implementation of bespoke exotic features such as redemption and conversion by the issuer, lockout periods, conversion and retraction by the shareowner.
Details of the hypothetical convertible bond are as follows:
Valuation date: 14 February 2017
Issue date: 1 January 2017
Maturity: 1 January 2019
Credit spread: 0.75%
Risk-free rate: 2%
Stock price: 52
The picture below shows the bond price obtained by using a third-party program.
Using the Python program, we obtain a clean price of 113.27
What's your question? Ask it in the discussion forum
Have an answer to the questions below? Post it here or in the forum
Gold prices were set to break their three-session winning run on Thursday, weighed down by a firmer dollar and as bullion’s outlook remains clouded by prospects of further interest rate hikes from the U.S. Federal Reserve. Spot gold was down 0.2% at $1,832.60 per ounce…
Italy and India have announced a plan to cooperate on defence and energy as Giorgia Meloni seeks to boost business deals with the Asian giant.
MOSCOW — Russia’s finance ministry is expected to increase its sales of foreign currency for state reserves to about $2.4 billion in the coming month, a Reuters survey showed on Thursday. The finance ministry will announce its buying plan for the period of March 7…
The FTC called AI a "hot marketing" term that some companies won't be able to stop themselves from "overusing and abusing."
Falling investment hurt Hungary’s economy in the fourth quarter as it slipped into a technical recession, a breakdown of the data showed on Thursday, with high interest rates and inflation hitting growth in central Europe. Hungary has followed the Czech Republic into a shallow recession…