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Valuing Coupon Bond Linked to Variable Interest Rate

Author

Listed:
  • Giandomenico, Rossano

Abstract

The paper analyses coupon bonds linked to variable interest rate in a contingent claim approach such that it can be decomposed in elementary options on interest rate and options to default. It is considered the case of continuous arithmetic average of interest rate in a simple capitalization to value the variable coupon paid by the bonds at maturity. The paper determines the expected interest rate on the bonds and the risk spread due to the default risk.

Suggested Citation

  • Giandomenico, Rossano, 2008. "Valuing Coupon Bond Linked to Variable Interest Rate," MPRA Paper 21974, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:21974
    as

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    File URL: https://mpra.ub.uni-muenchen.de/21974/1/MPRA_paper_21974.pdf
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    References listed on IDEAS

    as
    1. Robert A. Jarrow, 2009. "The Term Structure of Interest Rates," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 69-96, November.
    2. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    3. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    5. Giandomenico, Rossano, 2006. "Asset Liability Management in Insurance Company," MPRA Paper 16333, University Library of Munich, Germany, revised Jan 2009.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Contingent claim; Asian option; Stochastic continuous process;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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