Customer Reviews

Pricing Convertible Bonds

5 star:		(6)
4 star:		(1)
3 star:		(1)
2 star:		(4)
1 star:		(0)

 

 

Once the individual investor begins to grasp the complexity of convertible bonds, it beats me as to why he or she would not be inclined to give up the entire enterprise altogether. And this book is so chock full of a convertible maven's essential vitamins and minerals that, after the first reading at least, this investment arena will seem utterly Pyrrhic to a neophyte. Sadly, the book is dense enough that a newcomer is likely to miss its nimble, understated handling of a maddeningly complex topic. It is only after perusing the other available literature on convertibles that Kevin Connolly's competent, intelligent handling dawns on you. Then you see this text as a high-end stereo system amongst crude boom boxes!

Although Connolly writes under the pretext the reader knows next to nothing about the convertible, or even senior debt and common equity instruments, the book may not be the optimal starting point to understand convertibles. For the American reader, there is also the matter that the examples are in pounds sterling, and not in dollars.

But the text provides a terrific point-of-entry for the investor who is left wanting by crude convertible pricing models which fail to adequately account for subtler, but critical, details such as embedded long-put options, refix clauses, and what one ought to do with probability issues. The implicit theme of the book is "every convertible is a different animal...accept it and get nimble enough to competently deal with the instrument's intricacies." The reader is well served --with the theme, the non-condescending explanation, and the tools Connolly offers to deal competently and confidently with convertible complexities.

If you are a beginner to the area then this book could be of some use to you. However, for the more experienced practitioner it is limited in its usefulness. The phrase "beyond the scope of this book" becomes too repetitive whenever the interesting and challenging topics are mentioned. And it is precisely these modeling areas that differentiate the convertible bond from the more trivial option pricing problems that are covered well in other books. This lack of detail in the meatier areas is the biggest disappointment of the book. Generally it is well written and presents the issues clearly - just not enough of the issues that really matter.

Connolly has written a useful, practical book for those who are attempting to price these (increasingly) complex instruments. For more abstract or academic treatments of the topic, seek other sources and the innumerable academic journals of quant finance. But for a nut-work gotta-price-this-bugger-cause-my-boss-asked-me-to-and-Im-the-quant-guy-in-the-shop this guide, while not strictly a cookbook, is indispensable. Although it begins at a relatively basic level, it clearly and concisely explains every technique from the simple (y = mx + b) and then step-by-step ratchets up to the Excel-samuri level (MIN and MAX tests after multiple operations of option pricing trees (bi-nomial and tri-nomial)).

I limited my rating to four stars, however, because Connolly only mentions in passing the available (expensive) software-house products that do many of the same things his example spreadsheets do. Fin software needs critics, and I can think of no one better placed than the author to examine them and give front-line quant analysts his views.

In addition, like most worker bees, I try never to reinvent the wheel (programming in C++ and VB or anything else for this kinda thing is undiluted soul-destroying tedium), but at the same time want to thoroughly check out the foundational theory and techniques someone applied before I risk my career on someone elses work. In this case, a good list of the academic sources and current financial literature on the topic would have been a useful and welcome addition to this slender volume.

I suppose a final criticism is that we have all seen the exponential growth of credit derivatives in the past few years. Connollys next edition will need to address the topic of credit derivatives in relation to convertible bonds, as their use in combination with CBs provides alternate hedging, investment, and speculative strategies not explicitly considered in this book.

It's amazing that nobody has written a decent book on convertible bonds. This is the best in a very weak selection.
The book essentially starts at Chapter 6. If he wanted to write a book on modelling in excel he should have thougt about doing it before Jackson and Staunton (Modelling in Excel and vba). However, there isn't any vba here. How another reviewer can say that the pace accelerates enough to keep the attention of the expert is crazy, Chapters 1-5 are very irritating; as I say, they might be fine in another book.
The author's avoidance of vba is a drawback. Why not? It is a logical thing to do.
In the last couple of chapters, the author stops doing excel and just shows the graphs. He even freely refers to a embeded tree spreadsheet and then nonchalently points out that it isn't on the disk provided. Why not?
The real reason is that the binomial method becomes completely unworkable as soon as one introduces complications. One needs to use finite difference methods. FDMs are not even mentioned in this book. The author places his presentation as the state of the art, it isn't. I learned more in 4 pages of one of Wilmott's books (Mr. Numerical DE Solver) [Paul WIlmott on Quantitative Finance, section on convertible bonds] than I did from this book.
If you are interested in building models of convertibles, that can take into account any but the most vanilla features, this is not the place. For a conceptual non-quantitative overview, fine.

At last a book that addresses the more complex aspects of convertible bonds!

Pricing convertible bonds by Connolly is an excellent book both for the novice and the advanced practitioner.

Although this work starts by assuming that the reader knows very little, the experienced player will also benefit from the refreshingly simple approach to what are very complex instruments.

By the use of very simple stepwise spreadsheet type modelling, the user discovers for himself all unusual characteristics of convertible bond price behaviour.

This is certainly the first work ever to address the issue of share dilution, and never before has the modeling of refix convertibles been addressed in any text of which I am aware.

Although Connolly skirts the issue of random interest rates, the book is by far the best work produced on the convertible bond market to date.

Don't be fooled by its size relative to other financial textbooks. This is a comprehensive and well-written text, containing far more valuable information than previously available on the complex issues of pricing convertible bonds.

Starting from first principles, Connolly's tome takes the reader (both beginner and professional alike) step by step through the process of building a convertible bond model, gradually introducing the various complications that set CB's apart from other instruments.

The result is a success for the author and a reward for the reader who is prepared to work through the text and accompanying (free) software. Maybe there is such a thing as a free lunch after all!

I bought it when it had published about 2 years ago, and the content I can promise you still be very advanced and useful in this field nowadays. I have a lot of books related to CBs, while I can assure you this is the best I have ever had. Many of the others have been somewhat problematic, but not this one. As a fan of CB investing, I highly recommand you to have one to be more acquanited with the fantastic porperties of CBs, no matter you are a beginner or not!!

There are not too many books on converts, so i tought i buy it. I just tought this book is more detailed on converts.

It comes with a floppy disk, nobody uses disks anymore.

I would not recommend this book.

A good start, but not enough detail or complexity. Unfortunately, it doesn't seem like there is anything better.

This is a very good book. Connolly starts from the beginning, assuming you know nothing, but accelerates at just the right rate to hang on to beginners and not to annoy people who already know the basics. Admittedly, if you're a quant you'll know all this stuff (anyway, if you're already a quant you shouldn't need to buy a book on the subject in the first place). If you're not a quant, it's a fine introduction to how to model convertibles. In fact, there's enough information here for you to have a go at writing your own toy model that takes into account most of the complexities of CBs (including puts and resets), although you'd be a trifle crazy - or extremely confident - to start trading off a model you implemented *only* having read this book.

This is an excellent book for anyone who is a user of CB models, who understands the inputs and outputs, and who wants to know more about what's going on inside the model "black box".