Which of the following factors must be included in an option-based valuation approach to price a callable convertible bond? A) Stock prices only. B) Interest rates only. C) Interest rates, stock prices and their correlation. D) Interest rates and stock prices only.
D,but I am trying to think why not C.
C for sure.
Correlation matters. C
so,whats an example of the correlation? : is it the change in the risk free rate that in turn affects the capm required return on the stock?.
i think it may be D
If interest rates go up and the stock’s correlation to interest rates is 1 I think it should matter. C
D Interest rates affect value of bond and Stock price the conversion premium. Correlation - is implicit
and i’m a D here- i think if it’s convertible you could figure it out just w/ the stock px and interest rate. could be wrong though!
It’s a tough question - I’ve seen models that include it and models that don’t. Two things: a) Converts are usually called to get them to convert, not because they want to refinance at lower rates b) Credit is not mentioned but huge.
I GO FOR c
Stock prices…check Interest rates…check correlation between stock prices and interest rates…it’s in the valuation, but not sure if it’s a factor for pricing it. I’ll say d but wouldn’t be surprised to see c.
I think, in the book it’s only Interest rates and stock prices. But the correct answer is C as per QBank. I will need to confirm this later on and see how the correlation speaked it’s way to the list and UPPED the answer from D to C.
I would’ve put C too.