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Mathematical Pricing Model with Dilution Effect and Firm-value Process Volatility for Bond with Attached Warrant

Jie Miao

Abstract



In this paper, we consider the pricing problem of bond with attached warrant. Suppose that the firm value process follows a log-normal distribution, we develop a more realistic pricing model of bond with attached warrant with dilution effect. In this model, firm value contains value of bonds when we determine the price of warrant, and bonds’ maturity date is longer
than that of the warrants, firm-value process volatility is used. Then we make empirical studies by taking Wugang bond with attached warrant in Chinese securities market as an example. The result shows that our pricing model with dilution effect and firm-value process volatility is more accurate and more effective.

Keywords


Bond with attached warrant, Dilution effect, Firm-value process volatility, Empirical study.

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