Convertible Bond Pricing Models And Empirical Research On The Pricing Of Convertible Bonds

Convertible bonds are complex and widely used financial instruments combining the characteristics of stocks and bonds . It is one of few advanced and creative financial instrument which have been introduced to China in the recent years. It has more content in theory and more advanced skills in practices that compares with our known stocks, bonds and treasures.The paper simply describes the history of the convertidle bonds in China and introduces the character and the nature of the convertible bond. Compares with the domestic convertible bond and the foreign convertible bond,we find the convertible bonds in China are more attractive.Based on the characteristics of Chinese security market, the paper uses Black-Scholes opition pricing model and Binominal Trees model to extablish two different convertible bond pricing models .In the B-S pricing model we take the value of convertible bond apart four values and we describle a binominal one factor model for calculating the theoretical value . The purpose of this study is to investigate whether prices observed on secondary markets are below the theoretical fair values.The paper gives a detail empirical research on the pricing of convertible bonds . we present results of the empirical study comparing theoretical model prices with observed market prices. We find the theoretical price higher than real price 3.56% on average and analyse the factors which effect the calculating results.One most important factor is the market underprices the value of the convertible bonds. At last,the paper simply discusses the strategy of investing on the convertible bonds.