Convertible Bonds Optimal Redemption Strategy

The present research on convertible bonds mainly focus on the pricing problem. As for optimal call policy, there is not enough research. Therefore, this article elaborates the optimal call policy of convertible bonds from two angles-----corporate finance and pricing model.Researching the optimal call option from the angle of corporate finance is in fact researching the call motive and call behavior of corporations. If the result that the call behavior of the corporation is consistent with the optimal call conditions(including enough safety premium, after-tax cash flow advantage and wealth which are transferable to shareholders available) offered by corporate finance is gained, those optimal call conditions can be considered as the necessary conditions when the optimal call policy is implemented. Though this kind of research is intuitionistic and cursory, it can provide the managers with much guidance when they implement the call. The conclusion of this article is that safety premium and after-tax cash flow advantage can reasonably explain the actual call behavior and the wealth transferring effect can not solely explain the actual call behavior. But after the safety premium and after-tax cash flow advantage are considered, the explanation of the wealth transferring effect is enhanced.The above research does not consider the restriction of hard call requirement and soft call requirement on call behavior, and the call notice period is only analyzed with experiences. Therefore, starting from the pricing model and after considering the restrictions of various convertible bonds contracts, this article proceeds to build a model based on binomial tree, calculate the value of convertible bonds using the numerical method of forward shooting grid and gain the operation principle of optimal call of corporations. Therefore, the process of getting the optimal call policy should be like this. The first is to gain the optimal call point starting from...