A Study On The Double-factors Pricing Modle Of Convertible Bonds

The theories of modern option pricing and term structure of interest rate are the basis of convertible bond pricing theory. With the theories and Ho-lee model, in consideration of volatility of both firm market value and term structure of interest rate as well as the correlation between them, this paper presents an arbitrage-free double-factors discrete time pricing model for convertible bond. Through research on relation with continuous time model the reasonableness of this model can be proved. This paper also does empirical tests on a kind of continuous time form of the convertible pricing model, and deduces that the model's predicting ability changes in different market conditions. We illustrate background, purposes and frame of the research mainly in the first chapter. The content of the Second chapter is document summary. We demonstrate the major modern option pricing theories and term structure of interest rate theories and the convertible bond pricing theories in section 1 of the second chapter, discuss these theories' fundamental function for the paper in section 2, and then get research method of the paper. Chapter 3 is the center of the paper. We interpret four classical option pricing theories for convertible bond pricing theory. We make pricing model of convertible bond under the condition of stochastic interest rate in section 2.We do empirical test on the model with several convertible bonds, and then draw a conclusion and present suggestion for later research in chapter 4.