Pricing the Decomposition of Callable and Redeemable Convertible Bonds with Payment of Interest

This paper establishes a pricing model for callable and redeemable convertible bonds with payment of interest using hedge method and obtains its analytic formula implied from reaction diffusion equations.Furthermore,it works out closed-formula for the zero coupon of putable convertible bond and interest of the convertible bond.This paper analyzes the parameters of theoretical value.It is found that callable and redeemable convertible bonds with payment of interest can be decomposed into convertible bonds,American down-and-in put options with call price as exercise price and common bonds as a bid,American up-and-in put options with the rate of call price to convertible price as exercise price and common bonds as a bid,and European call option with stocks as a bid,the product of convertible price multiplying yield rate of bonds as exercise price.Finally analysis of elasticity is made on the theoretical value of callable and redeemable convertible bonds with payment of interest regarding each parameter.