Pricing Convertible Bonds

Convertible bond is a very complex financial derivative. It has the fea-tures of both bonds and options. The investor can get downside stable income,or obtain upside return of equities. Thus pricing convertible bonds precisely is very important for both the issuing companies and bondholders. Now pric-ing convertibles is a common focus of both academic and practice.However, because of the hybird feature of convertible bonds, it is difficult to value the it.In this paper,the work focus on:1) Introduce the binomial tree model and present how to price convertible bonds using binomial tree.We also apply the binomial tree model to the Chinese market. We derive the value of convertible bonds of Ping An Insurance (Group) Company of China. Moreover, We propose some possible reasons which may cause the difference between the theoretical price and practical price.2) We choose the stock price of the issuing company as our state vari-able. Then we derive the single-model with contingent claims analysis.With the boundary conditions and the finite difference method, we get the the-oretical price of convertible bonds of Ping An Insurance (Group) Company of China.Based on single-factor model, we deduce the valuation equation of convertible bond which is subject to the credit risk.3) We introduce the theory of term structure of interest rates and some common stochastic interest models,for example,Vasicck model.Then the like-hood function and the maximum likehood estimator are given out. We also deduce the the valuation equation of convertible bonds considering both s-tochastic interest and stock price.Morover, we also show how to difference the two-factors model.