Abstract
Convertible bond is a type of hybrid security with both bond- and stock-like features. The Chinese market of convertible bonds has developed dramatically during the last decade. This paper will conduct a comprehensive analysis of this market. Firstly, a brief introduction of convertible bond and the historical evolution of this market in China is presented, then we analyze various investment risks related to convertible bonds. Next, this paper proposes the basic valuation model for convertible bonds, which is the Black-Scholes model and modifies it by taking the delusion effect of conversion into account, leading to the Gailai-Schneller model. In addition, the differences of the outcomes obtained by these two models are compared and analyzed based on the pricing of Shanghai Electric convertible bond. In the sixth part, this paper mainly explains two types of applications of convertible bonds in portfolio management. In the end, several problems existing in Chinese convertible market as well as some suggestions for solving them are discussed.
Highlights
Convertible bond is a hybrid instrument that is derived from the common corporate bond market with bond, equity- and option-like properties simultaneously
After analyzing the pricing of convertible bonds, this article proposes four problems existing in Chinese convertible bond market as well as for suggestions for its future development
In the case of valuing Shanghai Electric convertible bond, the results indicate that G-S model can measure the call option value more precisely than B-S model does and has generally lower outcomes
Summary
Convertible bond is a hybrid instrument that is derived from the common corporate bond market with bond-, equity- and option-like properties simultaneously. 4.3 Call Risk The mandatory redemption clause of a convertible bond provides the issuing company with a call option to repurchase part or all of the bond before maturity This option is generally exercised when the stock price is high or the market interest rate is relatively low so that the bond issuer can refinance at a lower cost. If bondholders do not sell the convertible bond or carry out the stock conversion after the issuer announces the mandatory redemption, they will eventually suffer a loss of market value. The B-S price of a convertible bond is the sum of its straight value and total option value, shown by equation (8)
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
