Hi everyone,Yet another question haha.Would just like to check, I am pricing an american style convertible bond using a trinomial tree method.At expiry in reference to the Connolly book on pricing CBs the payoff should be Max(St, Redemption + Final coupon)However I am a little unsure about at each node before expiry. Would the approach of valuing each node as the maximum between (Stock Price, PV of the Bond excl coupons already paid, intrinsic value of the option component) be correct?My rationale to exclude the coupons is derived from deriving the fair market price, i.e. if i bought the CB during its lifetime I wouldn't receive the coupons given to the previous investor. In addition, I didn't add the two components to take into account the opportunity cost, i.e. if we are considering the intrinsic value of the option component in the futuret then we would most likely exercise, since we can't do both I made it a MAX.This is a sanity check, so please comment whatever!Thanks all

what do you mean by "intrinsic value of the option" ? It seems to me that the value of the CB at any node should be the determined as follows as you roll back in the tree starting from maturity of the bond backwards. first compute the parity of the CB at maturity plus accrued interest from the prior step and then start going backwards:1. first compute the hold value at the node which is the expected value of the up node and down node from the next step as you roll back in the tree plus the accrued interest over the step. call this the hold value.2. if the CB is callable, the value is the lower of the call value (the issuer would call it back perhaps forcing conversion) and the hold value3. if the CB is putable, then if the put value is greater than the value so far, then use the put value (it is unlikely that if the CB is callable and putable at the same date that the put value would be higher than the call value)4, if the parity value (number of shares times stock price) at the node is greater than the value so far then the CB value is the parity.edit note: edited to clarify

I agree with daveangel, and I would add that as far as I understand the currently accruing bond coupon may or may not be received upon conversion/put/call and that depends on the term sheet (screw clause?).