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.
Authors
- Lin Ai (ORCID: https://orcid.org/0000-0003-0921-7524)
- Song-Ping Zhu
- Guanghua Lian
Institutions
- Twitter (United States) (US)
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