The pricing processes of the stock and corporate assets for convertible bonds follow the Markov regime-switching model, while taking the equity dilution effect and default risk into account. This study aims to obtain a pricing formula for convertible bonds using change of measure and risk-neutralized pricing theory. Theoretical and numerical analyses show that the introduction of the Markov modulation model and the equity dilution effect can prevent the overvaluation of convertible bonds. The findings also indicate that convertible bond values differ obviously under various initial economic states.