The purpose of this study is to analyze the pricing models for convertible bonds, and compare their theoretical prices of publicly offered convertible bonds in Korea with the market price. The models compared are those of Ingersoll-Brennan-Schwartz (1977, 1980), Tsiveriotis-Fernandes (1998), and Hung-Wang (2002). Ingersoll-Brennan-Schwartz employs the firm value as a state variable while the other models are dependent on the stock price. Tsiveriotis-Fernandes decouples the value of convertible bonds into the stock component plus the bond component, and discounts them with risk-free interest rate and risky interest rate, respectively. Hung-Wang’s model uses two more state variables, risk-free interest rate, and default risk. For the empirical comparison I modified the original models. For Ingersoll-Brennan-Schwartz I reconstruct the default barrier to consider the default event before maturity of the convertible bonds. For Hung-Wang’s model only stock price and default risk are used as state variables. The test shows that Hung-Wang’s model produces the theoretical price closer to the market price with low standard deviation than the other model.
