| With the development of convertible bonds in China, it's evaluation has been the focus of our study. As a new derivative in the market, we find it difficult to evaluate the convertible bonds. The traditional model used in the pricing of convertible bonds splits the value of convertible bonds into straight bonds and options. However, the theoretical evaluation under this model can not accurately predict the market price of convertible bonds. There are a few reasons causing the difference between the market and model prices. Firstly, the value of straight bonds changes with the options price. When the convertible bonds are converted into stocks by the investors, the investors are not able to get the whole payment of interests under straight bonds because the convertible bonds are not bonds any more. They have become stocks, and the investors can only get the dividends payment instead of interest payment. Secondly, the options price under the convertible bonds depends on the relatively value of different options set by the issuers(conversion privilege, callable options, sellable options, etc.). If one of them is exercised, the others will be removed or devaluated. Thirdly, the investors may exercise the options before the expiration date of convertible bonds based on their subjective judgment instead of just waiting till the bonds are due. So it is not reasonable to treat the options as European style.Because of the above defects of the traditional model, we try to usea revised model-the value of convertible bonds=MAX(straight bondsvalue, conversion value) +MAX(convertible options value, callable return, sellable options value) to reevaluate the convertible bonds instead ofusing the traditional model-the value of convertible bonds=straightbonds value+options value. The case study and the empirical analysis show that the revised model can reduce the difference between the market and model prices and give a more accurate prediction to the price of the convertible bonds.
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