The Pricing Model Of Convertible Bond And Empricial Analysis With Interest Rate Risk

Convertible bonds, which have the advantage of bonds and stocks, is a new kind of financial tools. As Chinese economic development, financial markets continue to improve and it’s the fact that the investors need more financial products to meet their demand. Convertible bonds have the advantage of both stock and bond, as well investors are familiar with the characteristics of stock and bond, and therefore, investors pay a lot of attention to this financial production.There are many different views about convertible bonds, so the convertible bonds pricing formulas are different from one to other. Some people think that the convertible bonds have two parts:bonds and stock options. And some one thinks the convertible bonds have many boundary conditions. From analyzing the convertible bonds conditions, investor will find what the price of the convertible bond is best for him, and they will find what the price make him to hold the convertible bond to maturity, and what the price make him to use the conversion rights of convertible bonds to convert into shares. This paper refers to the above conditions, and analyzes the convertible bond in follow way:First of all, we give a brief statement about the convertible bonds, then we give the definition of convertible bonds, and after that we introduces the nature of convertible bonds, such as the term that help the investor to keep the loss, the term that help the company to sale the convertible bonds, and so on. Then I introduce the domestic and international convertible bonds market. There are many models to analysis the price of convertible bonds. We take the convertible bonds as two parts:a European call option and corporate bond, so the convertible bonds like a European call option and corporate bond portfolio. We calculate the present value of convertible bonds. By using B-S pricing method and bond discount method to calculate the price of options and company bonds, we get the price of two parts. Then consider the interest rate, we use the Nelson & Siegel interest rate pricing model in this paper studies, to calculate the interest rate of the convertible bonds. After that convertible bond pricing formula will be put in the actual market, there will be many restrictions to the convertible bonds, so we take conditions into mathematical expressions, as the boundary conditions of the convertible bond pricing equation. Through analysis the bond market and corporate bond market, we can see a clear difference between the two that we often say that the interest rate risk premium. And the difference between bond market and corporate bond market interest rate as the interest rate risk premium factor in convertible bond pricing formula. Finally, take the CBs of Bank of China to do empirical studies, through analysis, we test convertible bond pricing formula is applicable or not, and then we give some useful information about the convertible bond market.