The Research On Pricing Of Chinese Convertible Bonds

Convertible Bond is a kind of financial instruments that is based on the carrier of corporate bond and permits the holders of convertible Bond to convert it into common stock at the stipulated price in the stipulated time. It owns bond and stock's properties, that is to say, not only its interest rate is lower than common bond, but the issuer can harmonize the proportional relation of equity capital and debt capital, so as to benefit optimizing capital structure. Based on above, Convertible Bond has become a kind of mature and popular financial instruments in the western developed countries. Nowadays, global convertible bond market takes on a new look and becomes more mature and prosperous as time goes by. In U.S.A, Europe-union, Japan and South-east Asian countries and regions, Convertible Bond market has played an important part of financial market and boosted these countries and regions' financial market to prosperity. While in China, after ten years' dreariness, Chinese convertible bond market starts to grow rapidly. As an intermediate financial instrument, its development and prosperity is helpful to solve Chinese capital market troubles such as extortionate stock financing ratio, lack of investment tool and financial innovation.Since convertible bond is a new financial instrument of Chinese capital market, the market participants have not got a comprehensive understanding and the related theory researches are on the way. Under the given circumstance, the research on the pricing of convertible bond of this thesis makes sense on the early stage of Chinese convertible bond market both theoretically and practically.This thesis starts with the theoretical development of convertible bonds, followed by the provision design analysis. Aiming at the characteristics of Chinese security market and the difficulties of pricing, this thesis constructs Black-Scholes option model with credit risk. And on the basis of the model, this thesis exerts an important emphasis on the research of four convertible bonds' theoretical value, along with the graphs about theoretical value and practical price by matlab programs, then this thesis calculates the difference between the theoretical value and practical price, and finds out that the price is apparently underestimated, which reflects that the traditional pricing model is too simple to explain the difference. In order to diminish the difference, this thesis drafts out the innovated pricing model in the following paragraph, recalculates the four convertible bonds by utilizing innovated pricing model, and re-describes the theoretical value graph and the practical price graph. The research indicates that innovated pricing model can reflect, in a better way, the influence upon the convertible bonds value from the bond provision, conversion provision, call provision and put provision.In all, this thesis provides a comprehensive valuation framework of Chinese convertible bonds and discusses the provision design. It opens the series of thoughts on further researches, and provides references for both issuers and Investors.