Convertible Bond with Refix Feature
A convertible bond is a bond with convertible options to the investor such that debt can be converted to the underlying stock in a future date if the stock price performs well. When stock price rises high, the bondholder can ride on the high stock prices and exercise the convertible option. When stock price deteriorates, the bondholder can still receive stable coupon payment if no default occurs.
We present a pricing model for convertible bonds which have a refix feature as well as the asset swap spread adjustment has been completed.
The single-factor version of the model is found to be accurate for the purposes of pricing convertible bonds which possess the refix feature. This includes situations multiple dates upon which the conversion ratio/conversion price is reset. In addition, the asset swap spread adjustment was verified to function according to design.
The model developed for vetting purposes is based on the binomial tree. For a standard convertible bond without the refix feature the value of the convertible on the terminal nodes of the tree is set to be the greater of the debt value, which is the face value of the bond plus the final coupon payment, and the conversion value, which is the conversion ratio multiplied by the stock price at the node.
Note that the model defines the conversion ratio as the number of shares per unit currency of face value and thus the conversion ratio is the inverse of the conversion price. It is in terms of the conversion price that the path dependence information in the accompanying example tree diagram is given.
References:
ResearchGate refix convertible pdf