Pricing Convertible Bonds Based On The Binary Tree Model

As a convertible financing tool between bond and stock convertible bond concurrently has a feature of bond, stock and option.Since convertible bonds are new financial instruments of Chinese capital market, the comprehension of market participants is far from intact and related theory researches are on the way. Under this kind of circumstance, the research on convertible bond value and provision design of this thesis makes a lot of sense on Chinese convertible bond market and the innovation of China financial instruments. This thesis starts with the element and the provision composition of convertible bond, then it carries out a lucubrate analysis on the value feature and influencing factors of convertible bond. Based on the analysis, the two-factor pricing model of convertible bond is issued to carry out a reasonable valuation for convertible bond and an empirical test with market data, which indicates that the two-factor binomial-tree model much better describes individual prices in the market than the other researchers by some people before. At the same time the convertible bonds are good-priced on the Chinese convertible market under a good stock market. So subsequently the thesis carries out an analysis on the reason of the difference between the theoretical value and the market price. At last on the basic of the research this thesis presents the policy proposals for perfecting the convertible bond in China.In all, this thesis provides a comprehensive valuation framework of convertible bonds. It opens the train of thoughts on further researches, and provides references for both issuers and investor.