The purpose of this study is to analyze the price of publicly offered convertible bonds in Korea using Takahashi-Kobayashi-Nakagawa model(2001). This model for convertible bonds explicitly takes default risk into account following Duffie and Singleton(1999). It provides a consistent and practical method for relative valuation of securities issued by a firm such as convertible and non-convertible corporate bonds and equities. For pricing convertible bonds, it is required to calibrate market prices of non-convertible bond and stock to retrieve some parameter with some assumptions to hazard rate and recovery rate.
Numerical comparisons of Takahashi model with other models show that this model is more accurate to explain market prices of Korean CB market. Takahashi model overvalues the issuing price by 19.28% on average, and overvalues the market trade price by 7.82% on average.
