Valuation and choice of convertible bonds based on MCDM

Wen Shiung Lee and Ya Ting Yang

Applied Financial Economics, 2013, vol. 23, issue 10, 861-868

Abstract: The pricing model of convertible bonds has emerged as an important assessment model for financial investment in recent years. This model suggests that the pricing model of convertible bonds can be decomposed into the Options Pricing Theory and Pure Bonds Theory. Literature in the past did not explain therelative weight and factors affecting these two models. This research is anattempt to explore the unexplained portion of the pricing model of convertiblebonds by adopting Decision-Making Trial and Evaluation Laboratory, Analytic Network Process, and Multiple Criteria Decision-Making of the VlseKriterijumska Optimizacija I Kompromisno Resenje. The model has been referred to three Taiwanese technology firms issuing convertible bonds for verification. The result indicated that the aforementioned two models are inter-affecting each other and in self-regression. Of the eight criteria, conversion price remains the critical factor affecting the pricing of convertible bonds. It was followed by stock price and yield rate. In assessing convertible bonds, the convertible bonds issued by the aforementioned three Taiwanese technology firms were also subject to testing. Convertible bond issue B approximates the expected return rate of the investors the most. It is the most preferable investment option of the convertible bonds issued by the three technology companies.

Date: 2013
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DOI: 10.1080/09603107.2013.770122

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