An Empirical Study on the Value Evaluation of the Chinese Enterprise Bonds

As to the immature Chinese enterprise bonds market and the imperfect distribution system, recently the value evaluation of Chinese enterprise bonds don't consider the impact of the insolvency risk and thus the investors bear the greater investment risk. Based on the Black & Scholes (1973) and Merton (1974) option pricing model as well as the basic methods of Geske & Delianedis (2001) and Vasicek (1999) (the credit evaluation model of KMV company) the paper establishes an evaluation model of enterprise bonds suitable for the Chinese situation and considering the default risk, tax cost and default risk. Furthermore, as a case study of "05 Shenergy Long-term Bond" (Issued by Shenergy Ltd. Company in "Shanghai Stock Exchange" on July 18th, 2005), we simulates the value evaluation process of enterprise bonds in use of the financial data during the periods of 2005-2007, and concludes that the intrinsic value of the debt will be significantly reduced if considering the insolvency risk. At the same time, we analyze the other potential factors of the long-term decline in the value of bonds. From the empirical study, the paper clarifies the basic principles of the value evaluation of the Chinese enterprise bonds and validates the adaptability of the option pricing approach in China, and further prepares for the combination of the insolvency risk factor with the value evaluation system and the full control of the investment risk of Chinese long-term bonds in the future.