Valuation of structured bonds in illiquid markets
Date
2014-02-17
Authors
Gora, Benard
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Abstract
Corporations often find it difficult to raise capital in illiquid markets such as most
African markets and if they do they pay a premium which is not only costly to
them but also propagates illiquidity in these markets. Convertible bonds provide a
cheaper source of nancing for issuers with the optionality of maintaining targeted
capital structures. However, these instruments are not popular in these markets as
they are less understood compared to their conventional counterparts and if used
are often mispriced. The main objective of this research is to provide a valua-
tion framework for structured bonds, speci cally convertible bonds where market
imperfections such as illiquidity are prevalent. This will entail customising the
standard valuation framework so that these market imperfections are incorporated
in the model. The valuation framework of the convertible bond is then applied to
an illiquid market where several deviations from the perfect-market benchmarks
exist and then observe what e ect these deviations have by comparing the theo-
retical value to that of a convertible bond assuming the market is liquid.
Description
Thesis (M.M. (Finance & Investment))--University of the Witwatersrand, Faculty of Commerce, Law and Management, Graduate School of Business Administration, 2013.
Keywords
Bonds, Structured bonds, Convertible bonds, Illiquidity, Valuation