Convertible Bond Pricing - SolvencyAnalytics

Convertible bond PricingWorking Paper Series2015-10 (01) 2015 Convertible bond PricingBal azs Mez 2015 Convertible bond investments may have a special role under Solvency II and the SwissSolvency Test as they are favoured over equities due to their convex payoff profile. Es-pecially under Solvency II, replacing equities by an optimized Convertible bond portfoliocan reduce the solvency capital requirement (SCR) significantly while keeping risk/return char-acteristics virtually unchanged. Therefore, we believe that for small and mid size insurancecompanies where constraints on investment volume are less relevant, Solvency II optimizedconvertible bond strategies will be an attractive alternative to formulating such investment strategies Convertible bond Pricing functions have to becorrectly implemented and test

depending on their moneyness in 4 categories: distressed, bond-like, balanced and equity-like. Figure 1: Convertible bond price, parity and bond floor - Source: Credit Suisse (2014) Figure 1 shows that the price of the CB can be decomposed into the bond floor plus the in-vestment premium or the parity plus the conversion premium.

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  Bond, Convertible, Convertible bonds

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