The value of a conventional convertible bond is the value of a straight bond plus the value of the option to exchange it for a specified number of shares of common stock. First, I develop a closed-form contingent-claims convertible bond valuation model that quantifies the value of the exchange...

Purpose – More than 80 percent of S&P 500 firms that issue ESOs use the Black-Scholes-Merton (BSM) model and substitute the estimated average term for the contractual expiration to calculate ESO expense. This simplification systematically overprices ESOs, which worsens as the stock's...

This paper provides a rationale for the use of convertible securities as the medium of exchange in corporate change-of-control transactions. We argue that convertible securities can resolve the information asymmetry about the bidder’s value while at the same time mitigating the information...

In July 1988, the Federal National Mortgage Association (FNMA) issued $500 million principal amount of 8.70% indexed sinking fund debentures (ISFDs). Five additional issues of ISFDs totaling $3.175 billion principal amount followed over the next 14 months. ISFDs contain an...

The comparable company method of valuation does not account for the value of corporate control. Therefore, the method must be adjusted if it is being used to value a company involved in a change-of-control transaction. We provide two alternative ways to adjust the comparable company method for...

I develop Heath-Jarrow-Morton extensions of the Vasicek and Jamshidian pure-diffusion models, extend these models to incorporate Poisson-Gaussian interest rate jumps, and obtain closed-form models for valuing default-free, zero-coupon bonds and European call and put options on default-free,...