Research On Pricing Model Of Convertible Bonds Based On Credit Risk

Convertible bonds appear in China security market for few years, and which have become an important type of financing instrument. It is of great significance to evaluate convertible bonds for issuing companies designing issuance provisions, investors reasonably investing, and convertible bonds market developing healthily.Professionals always focus on the way of pricing of convertible bonds. It has functions for issuer and investors. For the issuers, no one would buy the convertible bonds whose price are too high, while its ability of financing will limited if the price is too low. For the investors, the right pricing would bring the opportunity of arbitrage, there are lots of researches on the pricing theory, numerical arithmetic and empirical researches. However, because the rapid development of our convertible market in latest two years, the theoretical researches and practice don't develop in the same step which leads to lacking of systematic and manipulative. We need to do more researches on Chinese convertible bonds market pricing.The purpose of paper is to analyze the different models of convertible bonds and find the suitable model for Chinese capital market. We can make use of modern mathematics implement to pricing the Derive products and prove it is rational or reliability. Another aspect, we discuss the effect and credit risk of convertible bonds, Submit investment suggestion about convertible bonds which are very useful for investors in this paper.At first, the paper introduces relative definitions and compares different pricing models and then analyzes the particularity of market and convertible bonds and the factors that influent the pricing model, so the binominal tree model of credit risk is established. The empirical research chooses the convertible bond of China MinSheng bank as a sample. In addition, the paper studies the bias of the pricing by the two different models. The result shows that the bias of the binominal model is smaller.By calculation, we find that there is a deviation which exists in reality price and the marketing price may be underpricing sometimes. The reasons of the bias include: the low liquidity of convertible bonds, which restricts the price-founding function of the market, and the lack of short-sell, which can not achieve free arbitrages, hence the market prices departure the equilibrium prices.