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Theoretical And Numerical Valuation Of Callable Bonds

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  • Dejun Xie

Abstract

This paper studies the value of a callable bond and the bond issuer’s optimal financial decision regarding whether to continue the investment on the market or call the bond. Assume the market investment return follows a stochastic model, the value of contract is formulated as a partial differential equation system embedded with a free boundary, defining the level of market return rate at which it is optimal for the issuer to call the bond. A fundamental solution of the partial differential equation is derived, and used to formulate the value of the bond. A bisection scheme is implemented to solve the problem numerically.

Suggested Citation

  • Dejun Xie, 2009. "Theoretical And Numerical Valuation Of Callable Bonds," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 3(2), pages 71-82.
    • Handle: RePEc:ibf:ijbfre:v:3:y:2009:i:2:p:71-82
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    References listed on IDEAS

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    8. Buttler, Hans-Jurg, 1995. "Evaluation of Callable Bonds: Finite Difference Methods, Stability and Accuracy," Economic Journal, Royal Economic Society, vol. 105(429), pages 374-384, March.
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    Cited by:

    1. Saied Simozar, 2020. "Near Exact Calculation of American Options," Applied Economics and Finance, Redfame publishing, vol. 7(3), pages 55-69, May.

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    More about this item

    Keywords

    Callable Bonds; optimal financial decision; stochastic model;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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