An Empirical Analysis Of The Value Of Convertible Bonds In China By Black - Scholes Model

Convertible bond is a kind of complex derivative financial product which has characters of bond and stock option.The first convertible bond in the world was issued in 1843 by New York Erie, more than 180 years ago. Now it has become a mature product of financial derivatives market. Deep in the 1990 s in China, Baoan Company issued the first convertible bonds in the domestic market, far behind from the first convertible bonds of the world. Since then, there are a total of 107 convertible bonds issued in our country, with a total of 289.304 billion Yuan, accounting for less than 0.5% of total of all bonds. Namely, Compared to foreign developed market, convertible bond market in China is still in its infancy, and has great development prospects.The introduction of convertible bonds broadens financing channels of listed companies, reduces the dilution, and to a certain extent, eases the contradiction between ownership and managerial authority, and promotes the role of corporate governance structure, leading its popularity with investors and companies. The development of convertible bond market makes up for the inadequacy of Chinese finance market tools, promoting the internationalization of securities market in China.The pricing of the convertible bond is the core problem,the reasonable analysis of the value of convertible bond and estimation of its price will not only help investors make judgment and issuer make terms of the convertible bond,but also it can make up for the lack of systematicness and operability of convertible bonds pricing problem.This paper content mainly includes four parts. The first part is about the definition of convertible bond, basic characteristics, and differences from general debt and equity. After that, this thesis introduces detailed the convertible bond formation factors, which include three parts, namely, pure bond value, the conversion value, and option value. On the basis of the principle of minimum value, I define the value of the convertible bond of CB = MAX(B, P)+ C. Among them, CB as the theoretical value of convertible bonds, B as a pure debt value for convertible bonds, P for the conversion value of convertible bond, the option value of C for convertible bonds. The basic knowledge lays the foundation for later.The second part is to introduce development of convertible bonds in China, and by comparison of domestic and foreign markets, it is concluded that convertible bond market in China is at an early stage.The third part is the empirical analysis of the convertible bonds, and the detailed analysis on deviation between practical and theoretical price. I take one of convertible bonds for example to estimate the value of it,using 100 trading days from October 13, 2014 to March 10,2015 to calculate unknown parameters “stock volatility” in the Black-Scholes model. Finally I calculate the theoretical value of the bond. Compared with the market price, it is concluded that the market price of Shenran convertible bond is overvalued.The factors of deviation include that Black-Scholes design model itself is not enough, there are other factors influencing price of convertible bonds, our country securities market is imperfect, and I analyze the current events leading to being overvalued. Put forward some opinions about the future price movements. Reiterate the convertible bond is risk controllable,and profitable financial instruments.Finally I make some conclusion and recommendations about how to develop convertible bond market in China.