Single-factor convertible bonds valuation with dividends

This paper explores the valuation of convertible bonds with dividend payments during maturity period. Instead of the firm values model as the underlying variable, we propose a single-factor convertible bonds pricing model with dividends depending on the stock price. This method can reduce the difficulty of implementing and using the model comparing with two-factor valuation model. We also present all important convertible bond specifications to establish the boundary conditions of the pricing partial differential equation, whose numerical solution can be solved using the finite difference method. Therefore, the pricing model proposed in the paper is well suited for the valuation of convertible bonds.