Decision-making on investment in convertible bond based on Markov Process

Convertible bond is the derivative of stock and interest rate. The fluctuation in the stock price and the interest rate play the two important roles in investment process of the convertible bond, so the investors must take them into consideration when making decision on investment in convertible bond. Based on the theory of stochastic process and principle of sequential decision considering interest rate, this paper gives the method of decision-making on investment in convertible bond. Policy iteration method is applied to get the optimal policy, which provides the convertible bond holders with the theoretic basis to make decision.