Convertible bonds are more difficult to value than callable bonds because the analyst must consider the impact of all of the economic conditions that affect the value of the callable bond plus additional conditions that affect the value of the issuer’s common stock.
I don’t understand why this statement is accurate. Why do we have to take factors that impact callable bonds and not straight bonds? Since the formula of the convertible is
Value of convertible= Value of straight bond + call option on stock
Thanks!
Interest rate risk (bond) plus market risk (stock) are applied towards valuing a convertible bond.
This makes sense, but I am just stuck on the word “callable” bond, why not a straight bond? Its the word callable that I don’t understand
Cheers!
An issuer issues a bond that it can call (retire) before the issue’s maturity date. The reason to do this? Interest rates moved lower and the company wants to issue a new batch of IOUs at a lower interest rate.
An issue of straight bonds simply do not possess the callable terms that I just described.