Study On Chinese Convertible Bond Pricing Based On The Dependence Between Rate And Stock Price

Convertible bond is not only a fixed interest income which can be timely obtained like regular bonds,but a corporate bond,like an option,which can be converted into shares within a particular period according to the agreed price.For the majority of investors,it is a very popular investment instrument as they can acquire excess earnings by transferring it during the economic prosperity,and that they can take back the invested principal by the due date during the economic downturn.At the same time,it also gains its popularity in enterprises for the low interest that decreases the financing cost.The flexibility in transferring enriches the capital market,whereas it increases the difficulty in pricing.So the reasonable pricing of convertible bond is of great importance for optimizing investment strategies for investors,enacting proper policies for distribution companies and even the development of the whole bond market.In the available literature concerning convertible bonds pricing,most scholars only consider the impact of benchmark stock prices or the roles of interest rates’ term structure in financial product pricing,neglecting the possible relationship lying between them.This can surely influence the accuracy of the pricing outcome.Based on the above analysis,this paper talks about how the random fluctuations of risk-free interest rate and stock price influence convertible bonds pricing,with the dependence of the dual factors as the theoretical basis.Firstly,it estimates the parameters in CIR rate model and describes the random fluctuations of stock price by geometrical Brownian motion.Then the author uses Copula function to introduce the relationship between interest rate and stock price,and later integrates it into the pricing model of convertible bonds.Finally,Monte Carlo simulation methods are adopted to calculate the price of convertible bonds.This can greatly improve the current convertible bonds pricing theory so that it has a certain degree of creativity and academic value.What’s more,it has very important practical significance for financial market as this method is bound to promote the prosperity and development of the whole financial market.