Binomial Tree Model Used In Convertible Bonds Pricing

Convertible Bonds is one of the creative financial tools in the capital market, which is in the preliminary stage in China. But it attracts more and more attention with the development of Capital Market of China. Convertible Bonds has drastic progress in recent years, and has already ranked among the main financial instruments for listing companies and investment varieties at the second-market. Convertible Bonds is a kind of rather complicated credit derivatives, which has the characteristics of both common bonds and stocks, so it's impossible to price convertible bonds with the traditional pricing methods of bonds or that of stocks. Thus, it is very important and significance to use the financial derivative pricing theories in the West for reference and to strengthen the researches on financial derivative pricing theory and application in our securities market, and the appropriate pricing of Convertible Bonds bears favorably on investors and issuers, as well as the healthy development of the convertible bonds market.This paper begins with the basic theory of convertible bonds and its history in west and China. After compared with other traditional pricing methods, find out that the Binomial Tree Model is more effective in Convertible Bonds pricing. Then this paper gives a particular introduction of the Binomial Tree Model and improves it according to the additive terms of China which make it fit the actual market more. At last, the pricing model is used to calculate the value of Wanke Convertible Bonds, which is higher than the current market price and some reasons of the phenomena are given.