Considering The Credit Risk Of The Convertible Bond Value Analysis

There has been discordance between theoretical price and actual price of convertible bonds for a long time. Fan Xinting stated that this discordance was because of no consideration of credit risk in pricing convertible bond. So it's very essential to take account of proper credit risk model when pricing convertible bond .This paper try to do something in this field.Specifically speaking, this paper consists of three models as the following,(1) By making use of the technology of replication principle and Arbitrage Pricing Theory(APT) , we attain a partial differential equation(PDE) considering several parameters such as the probability of defaulting and factor of compensation.(2) We try to consider two stochastic process - the process of the value of company's assets and the process of price of this company's stock at the same time. In this model credit risk is described by the volatility of the company's value. We can deduce a formula of pricing convertible bond containing credit risk via neutral risk pricing theory.(3) Tow methods before can't take account of the attribution to the price of convertible bond that made by additional clauses. To overcome this shortcoming, we apply density model. The characteristic of this method is that many additional clauses can be simulated by binomial trees method and Monte-Carlo simulation in its algorithm.