Convertible Bond Pricing Model Analysis And Investment Strategies

Financial market can constantly create new Products and satisfy the needs of investors and enterprises. The vitality Power of financial market comes from this ability. Convertible bonds are a kind of new financial tool that suits the needs of the market.Convertible bonds are a kind of corporate bond that has double characteristics. They belong to both a kind of fixed income security and a kind of derivative security. To a convertible bonds holder, he can choose to keep the bond and ask the issuing company to pay interest and capital back or to convert the bond to the underlying stock to gain the dividend and the Premium of the stock Price. To the issuing company, at one hand it can circulate necessary funds with low coupon rate, at other hand if the income of the company is good and the Price of the company will go up, the convertible bond holder will convert the bond to underlying stock. The issuing company can take advantage of low cost of debt financing and reduce the dilute of the stock.As convertible bond has double characteristics, we divide the value of convertible bonds two part: the value of bond and the value of option. On the basis of cash flow model for the calculations of the bond value and Black-Scholes model for the option value, the revenue rate of similar corporate bonds are referred as discount yield rate, and price of Merchants Bank convertible bonds are taken as samples for positive study. It has been found that the theoretical value of convertible bonds equals to their market value.In consideration of Positive results and features of domestic convertible bonds, the author presents the investment strategies of convertible bonds. The convertible bonds holder can dodge the market risk and gain the steady income by investment combination.Of course, this paper is not perfect. It doesn't involve the dilution effect of theconversion from bonds to stocks, the effect on option price brought by fluctuations of interest rate. Consequently, further discussion will be called for.