An Analysis of Stock Participation Accreting Redemption Quarterly-Pay Securities

Abstract

Stock Participation Accreting Redemption Quarterly-pay Securities (SPARQS), a service mark of Morgan Stanley, represent another form of equity-linked structured notes. The SPARQS generally provide the investors with higher interest payments that substantially exceed the market interest rate for corresponding standard bonds, in exchange for a call feature. The call option limits the potential appreciation of the SPARQS in case the underlying common stock price rises. Moreover, the SPARQS are mandatorily convertible at maturity that entail more risk than ordinary debts due to the possibility that investors might not receive their principal amount in case the underlying common stock price declines. This paper derives a general pricing formula for the SPARQS using the binomial tree approach. An empirical test of a specific SPARQS issue indicates that the binomial tree model is quite accurate.

Citation

Chen, K.C., Widyasari Dewi, F. and Zhu, L. (2005), "An Analysis of Stock Participation Accreting Redemption Quarterly-Pay Securities", Chen, A.H. (Ed.) Research in Finance (Research in Finance, Vol. 22), Emerald Group Publishing Limited, Leeds, pp. 141-160. https://doi.org/10.1016/S0196-3821(05)22005-1