Convertible bonds can be difficult to value, given their hybrid nature of containing elements of both debt and equity. Further complications arise due to the frequent presence of additional options such as callability and puttability, and contractual complexities such as trigger prices and “soft call” provisions, in which the ability of the issuing firm to exercise its option to call is dependent upon the history of its stock price. This paper explores the valuation of convertible bonds subject to credit risk using an approach based on the numerical solution of linear complementarity problems. We argue that many of the existing models, such as that of Tsiveriotis.
