Study On Subordinated Bonds' Price Issued By Chinese Commercial Bank

Subordinated debt is a type of debt which is issued by a commercial bank and whose principal and interest ranks after other debts but before the bank equity capital should a company be closed. It's a special type of debt which is used by a commercial bank as an important way to manage its debt. Since the Chinese commercial banks started to issue subordinated debt in 2003, a total of over 2049.60 billion of RMB of such debt has been issued by stated-owned commercial banks, commercial banks with stock system and city commercial banks. However little research has been down on this new financial innovation, especially how to price it's value efficiently.Issuing subordinated debt generate positive results in replenishing the capital funds of commercial banks, enhancing market constraints over commercial banks, improving the ability of debt management, helping the banks builds the capacity of managed liability, promoting the bond market and providing more options for investors. So it is very significant to discuss the subordinated debt price. This article explores a tool to price subordinated debt's value issued by commercial banks.Using Black-Scholes' approach to price an option value, It takes a subordinated bond as a combination of some options underlying by banking assets. The model use two different types of call-options:It can be created by buying a call option on bank assets with general debt as strike price and selling a call option on the same bank assets with total debt, both options with same expiration data. It concluded that subordinated bonds issued by commercial banks in China are usually over-valued. This paper give also some suggestions and recommendations about how to deal with those problems.