Theoretical And Empirical Researches On The Pricing Of Convertible Bonds In Chinese Market

Convertible bonds are hybrid financial instruments possessing elements of both stocks and bonds. To the company, issuing convertible bonds is a more effective and flexible way to finance. To the holder, convertible bonds offer him/her the rights to forgo future coupon and receive some number of shares of common stock. In recent years, although incompletely developed, convertible bonds are also becoming one of the most important financial instruments in China. Evidences show pricing is the key character of a healthily developing bonds market. Thus, the present paper explores the pricing behaviors of convertible bonds market in China.Present thesis develop a stock-based pricing model with exogenous credit risk that accounts for almost all convertible bonds on Chinese market, which have soft put and soft call provisions.Positive studies of convertible bonds on SSE and SZSE markets of China, are also carried out, using daily price for a period of 2 weeks. The analysis , which show the theoretical values for the analyzed convertible bonds, are on total Chinese market on average 2.81% higher than the observed market prices, 2.96% on SSE market, 2.59% on SZSE market .Further researches show that misunderstanding of option value could be the reason for convertible bonds underpricing.