Pricing Model Of Exchangeable Bonds And Empirical Study

Exchangeable bonds(EB)are corporate bonds issued by the shareholders of listed companies under certain legislation,which,within a certain period of time,can be exchanged to the shares of the listed company that the issuer holds,in accordance with the agreed conditions.Usually,bondholders get lower net debt interest compared with normal bonds.But when the agreed conditions are met,they can either choose to exchange the bonds for the stocks,or held to maturity and enjoy the repayment of principal and interest.By issuing exchangeable bonds,issuer can not only obtain financing with lower cost,but also can sell the stocks with smaller market impact.The pricing of exchangeable bonds is inseparable from the analysis of the future trend of the stock price of the pledged listed companies.The exchangeable bonds will set a conversion price at the time of issuance.After six months to 12 months of protection,Exchangeable bonds into the convertible period,into the stock price after the stock price and the issuance of the beginning of the conversion price difference will largely influence whether the investors will transfer bonds or not.Investors’behaviors willalso affect the expectation of the value of the bonds.In the face of this problem,this paper assumes that the price trend of the stock obeys the Brownian movement and chooses the stock price of the listed company to calculate the volatility of the underlying stock before the issuance of the exchangeable bonds.Then,from the binary tree model,deduced stock volatility and the expression of the stock price of Brownian movement.Based on the above analysis,this paper uses MATLAB software to simulate the stock price trend after entering the convertible period and calculate the "bonus part"of the exchangeable bonds held by each investor when the price of the underlying stock is determined the value and the "debt part" of the value.And then set the judgment condition in this article,if one of the Monte Carlo simulation of the stock price is greater than or equal to the conversion price and the probability of conversion products,the output of this time the total value of the exchange of convertible bonds,and it discounted to the issue date,Which is based on 1000 times(the number of simulations set in this paper)Monte Carlo simulation of the current value of exchangeable bonds to calculate the mean,as the exchange of this bond pricing.In addition,since Monte Carlo simulation method can calculate the price of each standard stock,by setting the relevant variables,this article can also get the investor exit and exit time and other related terms of the relevant provisions of the bond.In the past two years of explosive growth,there are some convertible bonds,the conversion price is much higher than its current stock price,and,due to its volatility and other factors,entering the converting period,the convertible investors haven’t a proper time to convert theirexchange bonds into the shares of listed companies.So for this type of exchangeable bonds,this article more inclines to ordinary bonds,the pledged shares of listed companies can be regarded as a guarantee of traditional bonds behavior.As bonds with embedded options,the pricing of exchangeable bonds is relatively complex.But the same features that exchangeable bonds and convertible bonds share with each other may provide us with a way to study the pricing of exchangeable bonds through the pricing model of convertible bonds.By exploring methods including literature study,comparative analysis,case analysis and modeling research,this paper tries to solve the pricing of exchangeable bonds.Specifically,through reading large amount of paper regarding convertible bond pricing,and by comparing the similarities and differences between the exchangeable bonds and convertible bonds,we come to conclusion that the main differences between the above two are rooted in the issuers’ credit risk,exchange price adjustment behavior and redemption behavior.Based on these findings,combined with the study of convertible bond pricing model and exchangeable bonds practice,this paper gives an Monte Carlo pricing model for exchangeable bonds,with Matlab programming.The result of this paper provides a practical solution to the pricing of exchangeable debt issuance.