Fixed Income Security Pricing Models And Applications Based On Risk Compensation

In recent years, the growing financing needs caused by the economic development, the technological progress in capital market and the political support for direct financing channels together brought the prosperity of bond market. The market size has expanding quickly with the variety of products increasing largely. The development of bond market highlighted the importance of pricing. As for the basic idea that profit was the compensation for risk, this paper built a model based on risk-free interest rate, default risk and liquidity risk. Meanwhile, this paper found a way to separate the default risk premium and liquidity risk premium from the credit spread, solving the biggest problem in domestic liquidity pricing, parameter estimation.To test the pricing model, this paper compared the market price and the theoretical price of 32 bonds from the second half of 2006 to 2010 1st quarter. The results showed that the theoretical price obtained from the model were largely consistent with the market price. They had very similar trend, while the theoretical trend of price movements are gentler, making it more likely the true value of bonds. Further study found that the market price of short maturity bonds were closer to the theoretical price than the long maturity bonds. For the bonds issued by the financial industry and industrial, the differences between the market price and the theoretical price were small, but those of utilities bond were much larger. For the bonds whose market price had significant difference between market price and theoretical price, the theoretical price systematically slightly higher than the market price. And with the approaching of the maturity, the two converged. The empirical test results showed that the pricing model built in this paper had a certain significance for the bond market, the modeling method and the idea of risk pricing are worthy of recognition.Standing on the foundation that profit is compensation for the risk, the pricing model built in this paper could be expanded in many ways and had varieties of uses. In this paper, it was applied to asset-backed security pricing and credit risk mitigation warrant pricing. Those applications showed the flexibility and potential of this fixed income security pricing model.