Theoretical and Empirical Analyses of Convertible Bonds' Time Value

Convertible bonds can be seen as a portfolio of five positions:bond,conversion option,redemption option,call option,and conversion price correction option.The intrinsic value of convertible bonds is approximate to max(bond value,conversion value),and the time value of convertible bonds is the difference of convertible bonds' value minus their intrinsic value.The conversion option should not be exercised ahead of time throughout the valid period of convertible bonds,therefore,theoretically,the time value is always positive.Our empirical analysis of Chinese convertible bonds shows that negative time value is often observable,which reflects the low efficiency of the convertible bond market.