Valuation of structured bonds in illiquid markets

Gora, Benard
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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.
Thesis (M.M. (Finance & Investment))--University of the Witwatersrand, Faculty of Commerce, Law and Management, Graduate School of Business Administration, 2013.
Bonds, Structured bonds, Convertible bonds, Illiquidity, Valuation