Convertible Bond Pricing Models And Empirical Research

Convertible bond is hybrid derivative security that has characters of both stock option and bond. With the development of domestic security market in recent years, the convertible bond has become a main financial instrument for listing companies and investment varieties. Thus, the appropriate pricing of convertible bond bear favorably on investors and issuers, as well as the healthy development of the convertible bond market.This paper first illuminates detailedly the conception, feature and types of convertible bond.In the second chapter, this dissertation studied detailedly value component, main terms and best strategies. On this basis, it introduces the theory of option. The paper reviewed and analyzed systemically the relative study documents. By comparing the different pricing method, it pointed out the limitations of the former method. In Chinese market, one-factor model, which doesn't base on firm's market and contain dilution-factor and modified credit risk-factor that will changes with the stock price, may be the best choice.The fourth chapter is empirical section in which fix on the boundary condition and termination condition on the basic of the third chapter. Then, this paper introduces Binomial Tree, Finite Difference and Monte Carlo Simulation that be used in this paper as numerical arithmetic, estimating volatility and free-rate. On this basis, this paper analyzes the sensitivity of convertible bond to volatility and free-rate. At the same time, the thesis discusses the effects of credit-factor and modified-up-factor to convertible bond price. Then, the model carries out a valuation and test for convertible bond with Chinese market data. The conclusions presents that the convertible bonds are under-priced on Chinese convertible market, so subsequently the thesis carries out an analysis on the reason of the difference between the theoretical value and the market price.Last, on the conclusions of this thesis, give the advice:Predigest the terms of the Convertible Bonds, the modified-down term is too flexible to investors exactly expect. Close period enhance the irrational of price of convertible bonds; strengthen the evaluation of credit-risk; loosen the issuing conditions of convertible bonds; import the mechanism of selling short on markets of socks and convertible bonds.