Pricing Convertible Bonds With Credit Risk

Convertible bonds market sees a rapid development in China, its prospect is highly huge. It is the time to choose a suitable model for pricing convertible bonds. So the paper which studies the theoretical of convertible bonds has important guiding significance in practice.In the part of theoretical research, this thesis firstly analyses the characteristic of our convertible bonds market and its problem. After elaborating the concept and basic elements of convertible bonds, it analyses its characteristic and the composition of its value. Then the author reviews the theory of pricing convertible bonds and analyzes three models of option deeply: B-S model, Binomial Tree model and Monte Carlo model, also applies them to pricing convertible bonds and compares the results. On the basis of the theory of pricing model, the convertible bonds pricing model is expounded, including structure law which is based on the value of the company and the simplified form which is based on the stock price. By considering the credit risk and different provisions, it establishes a new model of pricing convertible bonds. In addition, when using simplified form to price convertible bonds, we find that it advances a new method: combining default contingent rate and binomial tree of stock price, to gain a new figure, and then use this tree figure to price convertible bonds.In the part of empirical analysis research, this thesis chooses eight convertible bonds in china market as samples, respectively applies B-S, Binomial Tree, Monte Carlo models to demonstrate, gains the theoretical price of these convertible bonds on first day into market; by comparing results, we obtain that the Binomial Tree model with credit risk is more closely tied to market prices. By the deep empirical analysis about the Chenxing bonds using the matlab 7.0, the result shows that the theoretical value out of this method has the same trend of the market prices, but there still exists a certain bias. The reasons for bias include: the lack of short-sell, which can not achieve free arbitrages; the factors which affect the value of convertible bonds are not taken into account pricing models.