Subordinated Debt Of Chinese Commercial Bank-Issuing And Pricing

Subordinated debt is issued by many banks in the world. Its priority is lower than ordinary debt, and higher than equity. Its maturity is long, usually longer than 5 years. It can not only supply the bank capital, but also can solve the conflict between long asset and short debt, if it is rationally designed. And because of the market discipline of subordinated debt, the issuing bank must increase the information transparency, improve the company management, and keep itself in good operation. So issuing subordinated debt can low the management risk, and make the bank more competitive.In our country, from Subordinated Debt of Commercial Bank Approach in 2004 to the end of 2007, there are 20 banks have issued 38 subordinated debentures. This paper researches the characteristic of subordinated debt issued by commercial bank in our country, including issuing modes, object, scale, maturity, and issuer option. According to the international traditional interest rate difference between the subordinated debt and national debt, the interest rate of subordinated debt is low in our country.Pricing the subordinated debt in theory, need to consider two problems. The first one is whether the issuer can be bankrupt. If there is no bankrupt cost, analyze the payoff of debt holder (including subordinated debt and ordinary debt) and shareholder when maturity. The value of subordinated debt can be expressed as difference between the values of a call option on the value of the bank with strike price equal to the value of ordinary debt, bought from ordinary debt holders, and a call option on the value of the bank with strike price equal to the value of total debt sold to shareholders. According to Black-Scholes formulas, can calculate the value. If there is bankrupt cost, assume the cost reduce the collateral value of assets in liner, subtract the cost from the bank asset, and analyze the payoff again. The second one is whether the debenture has issuer option. Using the H-J-M model to price the option of buying back, calculate the price using T-bonds call option formulas. Therefore, for a subordinated debt, the price can be divided to two parts, one is the net price, and the other one is the option price.This paper calculates the subordinated debt issued by Bank of Communications in March, 2007 as an example. Conclude that the practice price is lower than the theory price, and research about the difference.The subordinated debt market in our country is developing. In the long run, we have to improve the relevant law, keep the issue and transaction market orientation, and enhance the supervision to guarantee the interest of investors. At the same time, we should foster more investors, increase the issue and transaction of the subordinated debt, and make great efforts to improve banks anti-risk ability and make our banks more competitive.