This thesis tried to evaluate convertible bonds taking stock price (instead of firm value) as an underlying asset. The purpose of this investigation was to make the pricing process more convenient especially for traders by using rather easily observable parameters such as stock prices, credit spreads. But it should have entailed some problem like a need to estimate stock price instantaneous expected return.
The result indicates that the main issue of convertible bonds pricing is conversion rights. The difference between market price and model price seems to mainly come from the mispricing of conversion rights and the reason of these phenomena can be explained in several respect.
Firstly , we saw that the assumptions used in this model could be violated when we saw the trend of some stock price series which shows jumps and changes of regimes. And this could make it difficult to maintain the stock price lognormality and constant volatility assumptions. Secondly, in the respect of market behavior , we also saw that some convention could distort the market price.
However, you can say the model works showing comparatively good performance. But, still, much part of the convertible bond pricing issue should be attributed to the fundamental issues related with evaluating firm value and derivative pricing. So it can be said there remains a great room for enhancement in pricing convertible bonds.
