Convertible Bonds With Reset Clauses: Execution Factors And Pricing Research

Convertible bond is a common investment vehicle in China market,receiving huge popularity for its combination of stock and bond characters.Specially on the Asia market,there is a reset clause of conversion price,whose existence has magnified the option worth of convertible bonds.It protects investors from suffering losses in the period of stock price downwardness.This paper circles around the reset clause of conversion price,by carrying out series of empirical researches.Firstly,this paper explores the reasons and the decisive factors behind the execution of reset clauses.Based on this,a relative analytical model was designed under the framework of Probit model,namely carrying out multiple regression analysis with data of convertible bonds issued between 2000 and 2016.This paper divides all the factors into two categories: clause set factors and operation factors of individual issuers.By doing so,this paper creatively establishes a prediction model of reset clauses of conversion prices,which could apply to the next step of convertible bond valuation.This paper utilizes binary tree model,with application of the previous reset clause prediction model,to come up with a theoretical price of convertible bonds under the consideration of reset clauses of conversion prices.Here this paper takes the example of “Zhong Ding Zhuan Zhai” to illustrate in details.As the empirical analysis shows,the theoretical price under the consideration of reset clauses is closer to real world market price,as well as echoing the reality that the majority of convertible bonds are undervalued.This paper intends to improve the valuation quality of convertible bonds,by fully covering all the major clause,so as to better serve investment decisions.The empirical results achieved the intended purposes.