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Empirical Test on the Application of Convertible Bond’s Pricing Methods

Author: ZhouXin
Tutor: CaoXiaoDong
School: Hunan University
Course: Finance
Keywords: Convertible bond Pricing methods Deviation Leading Line
CLC: F224
Type: Master's thesis
Year: 2009
Downloads: 97
Quote: 0
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Abstract


The history of convertible bond in our country is relatively short, with a developing period no more than twenty years. Being a financial product both entitles the characters of safe and growth, the convertible bond has strong attraction for both investors and enterprises. Due to the high complexity of the convertible bond, the pricing issue has always been a difficult problem, it makes investors and enterprises’work harder and harder. The purpose of this thesis is to find a more applicable way to price convertible bond of our country.This article first introduces the pricing methods of convertible bond civil and abroad in the first chapter, then researches both convertible bond’s market and clauses, uses the adjusted Black-Scholes Model, Binary Tree Model and Monte-carlo Simulation to price the value of the part containing right, and calculate the debt part with discounting method. The paper summarizes the Black-Scholes, Monte-carlo and Binary Tree pricing method in the second and third chapter, in the end, carries out the empirical research using figures of second half year of 2008 as a sample. There are two main criteria when comparing the advantage and disadvantage of the pricing methods: the first one is absolute average of the deviation is relatively lower; the other is theoretical value has stronger leading effect to the actual price of bond. We find that Monte-carlo Pricing Method performs better on both sides of deviation and theoretical value leading through detailed pricing analysis of 9 convertible bonds, when the stock price was low, the Black-Scholes Pricing Method performs better.In sum, this article summarizes the characteristic of our country’s convertible bond and finds a applicable way to price convertible bond of our country though the empirical research, it might benefit future research and the work of convertible bond market’s participator.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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