Convertible Bond Pricing Model And Empirical Study

As a new financing instrument, since convertible bond came to the capital market of China, because of its speculation and investment , it accepted by government and companies and investors . With drastic progress in recent years, convertible bond has already ranked among the main financial instruments for listing companies and investment varieties at the second-market.Convertible bonds are a kind of corporate bond that has double characteristics. They belong to both a kind of fixed income security and a kind of derivative security. To a convertible bonds holder, he can choose to keep the bond and ask the issuing company to pay interest and capital back or to convert the bond to the underlying stock to gain the dividend and the premium of the stock price. To the issuing company, at one hand it can circulate necessary funds with low coupon rate ,at other, hand if the income of the company is good and the price of the company will go up, the convertible bond holder will convert the bond to underlying stock. The issuing company can take advantage of low cost of debt financing and the dilute convertible bond has double characteristics, we divide the value of two part: the value of bond and the value of option.This paper researches the pricing of convertible bond from two parts which include the value of bond and the value of option. The structure of this paper is as follow:Chapter one introduces the background and the significance of the paper, .It also introduces the history of the development of convertible bonds in foreign and domestic and review the papers of the pricing of the convertible bonds. It introduces the work and the innovation of this paper.Chapter two introduces the definition, basic elements as a kind of bond and corresponding clauses of convertible bond, then it introduces the character of convertible bond and analyzes the structure of the value of convertible bonds and brings benefits of the financing to corporation.Chapter three began to analyze the pricing of the convertible bond. It introduces pricing models of convertible bond, then analyze the market of convertible in China and put forward the amended model, and to modify the method of estimate for stock fluctuation ratio.Chapter four does some empirical research for modified model which we can compare with traditional evaluation model. Then we use the modified method to calculate the relevant stock fluctuation ratio, we substitute into modified model to check if it is better than the method before. So we get the relevant result.