The Pricing Analysis Of China's Corporate Bonds

The corporate bond, adding something fresh to bond markets, is a newly-born financing tool in the Chinese capital market. Whereas, in developed countries, it is the first choice for financing in capital markets, playing an essential role in finance and capital markets.To develop the corporate bond market, top priority should be given to the pricing system of the bonds. The price of bonds should be decided by the market, not polices or anything else. The pricing systems are advanced in markets abroad, which are reflected by the three major interest rate term structure theories, accompanied by their individual pricing models such as the credit risk measurement model. Unfortunately, most of them can not directly serve domestic market due to the models' demanding market conditions and high data quality that are the presumptions on which these models work. Taking into account the specific domestic situations, this paper goes directly to the corporate bonds pricing analysis out of market data following an introduction to the relevant foreign models.The measurement of interest rate risk and credit risk is key to the pricing process with interest rate the universal risk of all bonds. If we take government bonds as free from risk, then we can turn to the interest rate term structure implied by the government bonds to address the measurement of interest rate. The paper imports the cubic spline method to chart the term structure of interest rate in China using available government bonds information. The measurement of credit risk can break down into 2 major methods: credit rating and structure models. Credit rating is simple in concept but extremely complicated in the rating process. Credit rating can not properly tell the specific and detailed credit risks of corporations in current China because all the Chinese corporate bonds are AAA rated. Consequently, we turn to the KMV model. The paper relies on the probability of default to measure credit risk. When measuring both credit and interest rate risk in domestic market, the paper points out some ideas to improve the pricing process and gives some advice on further study.