Pricing convertible bonds with refix clause

Abstract

The following thesis extends the Cox-Ross-Rubinstein framework of binomial tree models in order to analyze the price of convertible bonds with conversion price refix clause. A convertible bond is a hybrid security, having both the bond component and option component, are both subject to default, thus appropriate probabilities should be applied when recursively determining the price back in time. The following thesis is based on a reduced- form model which uses stock price as the only state variable, with the use of credit spread as additional parameters to take into account for default risk. Due to the path-dependent nature of convertible bonds with a conversion price reset clause, multi-layer lattices are created.