The Valuation Of Convertible Bonds With Credit Risk

Although convertible bond is in the preliminary stage in China, it attracts moreand more attention with the development of Capital Market of China. As a hybridderivative security that has characters of both stock option and bond, convertible bondhas already ranked among the main fnancial instrument for listing companies andinvestment varieties at second-market. Thus, it is very important and signifcance touse the fnancial derivative pricing theories in the West for reference and to strengthenthe researches on fnancial derivative pricing theory and application in our securitiesmarket, and the appropriate pricing of convertible bond bears favorably on investorsand issuers, as well as the healthy development of the convertible bond market.This paper begins with the basic theory of convertible bonds and its history inwest and China. In this paper, I expend the corporate contingent claims model byAyache, Forsyth&Vetzal (2003), assuming a Poisson type default process in jump-difusion model. I use the binomial tree method and fnite diference method to solvethe problem and analyze the sensitivity of credit risk and jump. At last, the pricingmodel is used to calculate the value of Shihua Convertible Bonds, which is higher thanthe current market price and some reasons of the phenomena are given.