Within the structural approach for credit risk models we discuss the optimal exercise of the callable and convertible bonds. The Vasiĕk-model is applied to incorporate interest rate risk into the firm’s value process which follows a geometric Brownian motion. Finally, we derive pricing bounds...

Within a default intensity approach we discuss the optimal exercise of the callable and convertible bonds. Pricing bounds for convertible bonds are derived in an uncertain volatility model, i.e. when the volatility of the stock price process lies between two extreme values.

The paper offers a new explanation for the widely observed use of redeemable and convertible preferred stock in venture capital finance. Redeemable and convertible preferred stocks can be used to endogenously allocate cash flow and control rights as a function of the state of nature, the...