A study on quantitatively pricing various convertible bonds

Financial derivatives are becoming increasingly popular among investors as well as academic researchers. Among these, convertible bonds have received a large amount of attention since they are beneficial to both the issuer and holder in the sense that they help reduce the cash interest payment for the issuer while enabling the holder to reduce the risk of directly holding the underlying stocks. Despite the popularity of convertible bonds in practice, their pricing problems still remain challenging not only because most of them traded in real markets are of American-style, but also due to many additional features that could be introduced into vanilla convertible bonds to cater for different demands. Thus, convertible bonds are often priced with various numerical approaches because the predominant complexity arises from the determination of the bond price together with different free boundaries, which are introduced due to the incorporation of various additional features.