Exchangable Bond Pricing: Modeling, Empirical Research And Case Analysis

Exchangeable bonds(EB) are corporate bonds issued by the shareholders of listed companies under certain legislation, which, within a certain period of time, can be exchanged to the shares of the listed company that the issuer holds, in accordance with the agreed conditions. Usually, bondholders get lower net debt interest compared with normal bonds. But when the agreed conditions are met, they can either choose to exchange the bonds for the stocks, or held to maturity and enjoy the repayment of principal and interest. By issuing exchangeable bonds, issuer can not only obtain financing with lower cost, but also can sell the stocks with smaller market impact.By the end of 2014, Baosteel exchangeable bonds( "14 Baosteel EB", stock code "132001") was successfully listed on the Shanghai Stock Exchange, marking the officially opening of the domestic public offering of exchangeable bonds. It is followed by China Pacific Insurance(601601) and Aipaike(002180), both of which, in early 2015, announced that their shareholders intend to issue exchangeable bonds. Exchangeable bonds have become another significant financial innovation in domestic market after convertible bonds.As bonds with embedded options, the pricing of exchangeable bonds is relatively complex. But the same features that exchangeable bonds and convertible bonds share with each other may provide us with a way to study the pricing of exchangeable bonds through the pricing model of convertible bonds. By exploring methods including literature study, comparative analysis, case analysis and modeling research, this paper tries to solve the pricing of exchangeable bonds. Specifically, through reading large amount of paper regarding convertible bond pricing, and by comparing the similarities and differences between the exchangeable bonds and convertible bonds, we come to the conclusion that the main differences between the above two are rooted in the issuers' credit risk, exchange price adjustment behavior and redemption behavior. Based on these findings, combined with the study of convertible bond pricing model and exchangeable bonds practice, this paper gives an Monte Carlo pricing model for exchangeable bonds, with Matlab programming. The result of this paper provides a practical solution to the pricing of exchangeable debt issuance.