Spreadsheet Applications

CONVERTIBLE BOND PRICING MODEL

Model Description:

The stock price process on each node on the tree is assumed to follow the following process:
u = e^q*sqrt*dt for up movement. Q is the stock volatility, and dt is the time change.

The down movement of the tree is assumed to = 1/u

Assuming annual stock price move from each node, we are pricing the stock from t=0 and moving forward through the tree till t=5.

At node 4 (t=4), the stock price is equal to: St*u^4 for the top node, St*u^3*d, etc.

And the probability for the up and down movements are assumed to be:
P = (e^r*td - d)/(u - d) for up movement and (1-p) for down movement.