Pricing Convertible Bonds: The Chou Chin Issuance

• Main Authors: Yi-Chien Chang, 張益堅
• Other Authors: Yuh-Dauh Lyuu
• Format: Others
• Language: en_US
• Published: 2004
• Online Access: http://ndltd.ncl.edu.tw/handle/52281220504119458007

碩士 === 國立臺灣大學 === 財務金融學研究所 === 92 === This thesis discusses the characteristics of convertible bonds (CB''s), using an issuance of the Chou Chin Industrial Corporation in year 2002 as an example. The contract of a convertible bond is usually quite complicated. We often look at the CB as a straight bond with an attached option to convert into common stocks. Furthermore, most contracts include the call provisions that the issuing company could buy back the issue under certain circumstances, the put features that the CB holders could sell the bond to the issuing company, and some reset features that allow the adjustments of the coupon rate, the conversion ratio, or the maturity date. In the Chou Chin’s case, the main effect of the call is to force the holders to convert the bonds into the common stocks. The conversion price is reset every half year. This thesis uses the Monte Carlo simulation to price the CB; therefore, handling the reset feature is straightforward. The put feature is a main concern of this thesis. A multi-layer Monte Carlo simulation is used to handle the put provisions. The Chou Chin common stock trading default event burst on March 6th, 2003, and the thesis will discuss this event and its consequences.