| dc.description.abstract | This article studies the literatures of the tree model for pricing convertible bonds, since convertible bonds are usually priced in practice using tree models. The study includes the advantages, disadvantages, modeling and pricing process of each tree model. Then, this article provides a new tree model for pricing convertible bonds. In this model, the stochastic stock price binomial tree model is modeled using the Cox-Ross-Rubinstein(1979, CRR) model; the stochastic risk-free interest rate trinomial tree model is modeled using the Hull-White single-factor model(1990, HW); and the interest rate tree model with default risk is modeled following the approach in Jarrow and Turnbull(1995), which added default probability(??) and recovery rate(δ) into the risk-free interest rate tree to represent the behavior of corporate bonds. Unlike Hung and Wang(2002) and Chambers and Lu(2007) both modeled the stochastic risk-free interest rate binomial tree using the Black-Derman-Toy(1990, BDT) model, the Hull-White single-factor model(1990, HW) can express the characteristic of mean reversion and negative interest rate, which is more suitable for practical application. This article considers the correlation between the stock price and the risk-free interest rate, and proposes a new adjustment method to solve the problem of the negative joint probability and relax the limit on the correlation coefficient. Finally, this article provides a numerical example and two practical examples. The last practical example in concert with examples of obtaining and processing market data, and estimate parameter to demonstrate the process and results of using this article′s pricing model in practice. Additionally, it analyzes sensitivity and adjustment method of correlation coefficient. | en_US |