Abstract
We use a tree which describes stochastic process of the stock price, the risk-free rate, and the risky discount rate simultaneously to evaluate convertible bonds. To be more realistic, we add the relationship between the stock price and interest rate and put provisions to the model to make the price obtained form our model consistent with the market price. In addition, we compare the difference of the price generated form different approach. The result shows that when using a binomial tree to evaluate the convertible bonds, we argue that the price generated form three kinds of credit spreads are all significantly higher than the market price and this approach tends to overvalue the price of convertible bond. As applying the model eliminating the relationship between the stock price and the interest rate and our approach to evaluate the price of the convertible bond, it’s evident that the approximately half the theoretical prices is nearly close to the market price and these two approaches seems to correctly estimate the price of the convertible bond.