The Pricing Of Convertible Bonds And Invest Strategies

Financial market can constantly create new products and satisfy the needs of investors and enterprises. The vitality power of financial market comes from this ability. Convertible bonds are a kind of new financial tool that suit the needs of the market.Convertible bonds are a kind of corporate bond that has double characteristics. They belong to both a kind of fixed income security and a kind of derivative security. To a convertible bonds holder, he can choose to keep the bond and ask the issuing company to pay interest and capital back or to convert the bond to the underlying stock to gain the dividend and the premium of the stock price. To the issuing company, at one hand it can circulate necessary funds with low coupon rate ,at other hand if the income of the company is good and the price of the company will go up, the convertible bond holder will convert the bond to underlying stock. The issuing company can take advantage of low cost of debt financing and reduce the dilute of the stock. As convertible bond has double characteristics, we divide the value of convertible bonds two part: the value of bond and the value of option.This paper researches the pricing of convertible bond from two parts which include the value of bond and the value of option and the strategies of investing the convertible bonds.Chapter one introduces the characteristics and the designing of the convertible bonds. It also introduces the history of the development of convertible bonds in foreign and domestic market and review the papers of the pricing of the convertible bonds. The value of the convertible bonds=the value of bond+ the value of European call option value + the value of sold-back + reset value-trie lost of investor's put option. As the development of Chinese convertible bonds is still in the prime stage, the domestic related research that develops very fast is in its initial stage.Chapter two introduces the setting of the pricing of the bonds, which is a part of the convertible bonds. Different pricing models for common bonds are concluded. Then we analyze the sensitivity and the influence of various elements, which affect the value of bonds.Chapter three introduces the setting of the pricing of the option of the convertible bonds. Different pricing models for various options are concluded. Then we use the Black-Scholes models to analyze the sensitivity of the various elements, which affectthe value of the option. These elements include stock price, conversion price, the volatility of the stock price, the maturity of the option, dividend and the risk-free rateChapter four provides some strategies of investing convertible bonds. We compare the investment of convertible to investment of the stocks and the bonds. We also talk about the basic strategies of investing and hedging in the convertible bonds markets and setting portfolio of the convertible bonds. We look forward of the convertible bonds marker in China and give some suggestions to develop our market in the last part of chapter four.