How does a “delayed” barrier feature affect the price of a convertible bond?

This paper presents a Partial Differential Equation (PDE)–based framework for pricing convertible bonds with a soft call feature. Unlike “one-touch” callable convertible bonds, soft-call provisions are defined through an averaging mechanism over a moving window. To model this averaging feature rigorously, two auxiliary clock variables are introduced to track the effective “real time” in the soft-call contract, which leads to two four-dimensional PDE systems. These high-dimensional PDE systems are first reduced to three dimensions and then further simplified to two dimensions by exploiting the structure of the admissible domain and applying a coordinate rotation. After this dimensional reduction, an integral equation (IE) approach is employed to compute the price of convertible bonds with a soft call. The resulting framework allows us to examine the impact of the delayed barrier effect induced by the soft-call feature.

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Publication Details

Journal
International Journal of Theoretical and Applied Finance
Published
2026-07-01
DOI
https://doi.org/10.1142/s0219024926500172
Primary Topic
Stochastic processes and financial applications
Type
article
Field-Weighted Citation Impact
0.00
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article

How does a “delayed” barrier feature affect the price of a convertible bond?

Lin Ai, Song-Ping Zhu, Guanghua Lian
International Journal of Theoretical and Applied Finance
Stochastic processes and financial applications
article

How does a “delayed” barrier feature affect the price of a convertible bond?

Lin Ai, Song-Ping Zhu, Guanghua Lian
article en

Abstract

This paper presents a Partial Differential Equation (PDE)–based framework for pricing convertible bonds with a soft call feature. Unlike “one-touch” callable convertible bonds, soft-call provisions are defined through an averaging mechanism over a moving window. To model this averaging feature rigorously, two auxiliary clock variables are introduced to track the effective “real time” in the soft-call contract, which leads to two four-dimensional PDE systems. These high-dimensional PDE systems are first reduced to three dimensions and then further simplified to two dimensions by exploiting the structure of the admissible domain and applying a coordinate rotation. After this dimensional reduction, an integral equation (IE) approach is employed to compute the price of convertible bonds with a soft call. The resulting framework allows us to examine the impact of the delayed barrier effect induced by the soft-call feature.

International Journal of Theoretical and Applied Finance
Twitter (United States) (US)
Openalex Percentile: Top 5%
Stochastic processes and financial applications
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