Valuation of Convertible Bonds Based on the Black-Scholes Model

Department of Mathematics, University of Liverpool, Liverpool, England

Corresponding author: sgywa181@liverpol.ac.uk

Abstract

The objective of this paper is to estimate the value of convertible bonds using the Black-Scholes model. The paper commences with a comprehensive analysis of the theoretical composition of convertible bonds, with particular emphasis on their dual nature, comprising both a debt component and an embedded option component. Subsequently, the option aspect is valued using the Black-Scholes model. By integrating real market data, the study calculates the pure bond value and the option value for CITIC Convertible Bonds, thus determining the total bond value. The findings indicate that market prices for convertible bonds are below their theoretical values, suggesting potential arbitrage opportunities. In conclusion, the paper examines the key factors that influence the theoretical valuation of convertible bonds, including coupon rates, market interest rates, stock price volatility, and the risk-free rate. These factors play a critical role in determining the value of convertible bonds. The findings of this research are of value to both investors and issuers in their assessment of the value of convertible bonds.