Convertible debentures are hybrid securities: they are similar to regular bonds in that they pay fixed coupons and principal at maturity, but at the same time they can be exchanged for common stocks of the issuing firm. As in the case of wairants, if the conversion option is exercised, the firm will issue new stock, diluting its property. Typically, these securities are callable after some years, enabling the firm to force the conversion of the debentures. In this paper we study a convertible debenture with conversion terms variable in time, callable by the firm at a call price also function of time, and we model dividend yields and coupon payments as continuous in time. Finally, we develop a numerical example in order to asses the relative importance of the features of the bond.
Keywords:
Convertible deventures, Continuous dividend yields, Bonds features
