Research On Pricing Convertible Bonds Based On The Complete Decomposition Method

As one kind of derivative financial products, convertible bond has become an important investment and financing tool. Therefor, correct assessment of value of convertible bonds is of great significance for both pulishers and investors. As a result, research on pricing convertible bonds has always been a hot point in finance research area. However, convertible bonds are sophisticated financial instruments involving simultaneously bonds, equities and option.It is very difficult to value them. In the developed capital market, they are generally valued with numerical methods. However,their valuation efficiency and precision are not high enough. The analytic solution is the highest efficient method among all the methods.Firstly, in this paper,the fundamental elements,typical characteristics of convertible bonds and the elements of valuation of bonds and valuation factors are analyzed. Then, the typical pricing models and methods of convertible bonds are introduced simply. And the advantage and disadvantage are analyzed .After that, after having summed up the research results of valuing convertible bonds in the past, according to the features of clauses of convertible bonds, based on the risk-neutral pricing principle, the analytic formulae of complex default coupon-bearing callable convertible bonds with soft call condition clause have been worked out by regarding stock price as the underlying asset and employing the complete decomposition pricing method and martingale pricing method.And then,the parameters are modified according to the China's market.firstly, the Adjustment factor of credit spread is introduced,which is negatively correlated with stock price and positively correlated with the volatility of stock price.Secondly, the practical redemption strike price is introduced according to the financial crisis cost theory and the delay redemption. Meanwhile,by introducing a simply methrod of valuing the strike-price-adjusted provision, this paper provides the theoretical price of convertible bond with strike-price-adjusted provision.All of these modification makes the pricing formulae more accurate.In the empirical part, six convertible bonds are chosen as speciments. Then, the theorical price of convertible bond is compared with market price and the pricing error is obtained. By analysing the empirical result, we find that the analytic formulae and the modification of parameters are both effective. We also find that market price and model price are cointegrative in long period. At last, by introducing the lag pricing error, the model price can be used to forecast market price.In the last part , some achievements and disadvantages of this paper as well as some advices are given.