Valuation of embedded options in non-marketable callable bonds: a new numerical approach

Result code in IS VaVaI

<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F00216305%3A26510%2F22%3APU145232" target="_blank" >RIV/00216305:26510/22:PU145232 - isvavai.cz</a>

Result on the web

<a href="https://journals.vilniustech.lt/index.php/TEDE/article/view/17060" target="_blank" >https://journals.vilniustech.lt/index.php/TEDE/article/view/17060</a>

DOI - Digital Object Identifier

<a href="http://dx.doi.org/10.3846/tede.2022.17060" target="_blank" >10.3846/tede.2022.17060</a>

Result language

angličtina

Original language name

Valuation of embedded options in non-marketable callable bonds: a new numerical approach

Original language description

The issue of how to price options embedded in callable bonds has attracted a lot of interest over the years. The usual bond valuation methods rely on yield curves, risk premium, and other parameters to estimate interest rates used in discounted cash flow calculations. The option to retire the bond is, however, neglected in the standard pricing models, causing a systematic overvaluation of callable bonds. In the event of a decline in interest rates, investors are exposed to the risk of a lower return on investment than indicated by the yield to maturity. We propose a novel approach to valuing the risk that the issuer will use the right to buy back the bond at a specific call price. While prior models are focused on valuing marketable callable bonds, we deliver a unique approach to valuing bonds with an embedded European option (or a multiple option) that are traded solely through private transactions. These can typically be characterized by the lack of historical records on transaction prices. The modular character of calculation we propose allows us to take into account additional information, such as probable behaviour of the issuer, available opportunities for achieving alternative earnings or different estimates in terms of interest rate development.

Czech name

—

Czech description

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Type

J_imp - Article in a specialist periodical, which is included in the Web of Science database

CEP classification

—

OECD FORD branch

50202 - Applied Economics, Econometrics

Project

—

Continuities

S - Specificky vyzkum na vysokych skolach

Publication year

2022

Confidentiality

S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

Name of the periodical

Technological and Economic Development of Economy

ISSN

2029-4913

e-ISSN

2029-4921

Volume of the periodical

28

Issue of the periodical within the volume

4

Country of publishing house

LT - LITHUANIA

Number of pages

22

Pages from-to

1115-1136

UT code for WoS article

000827422900001

EID of the result in the Scopus database

2-s2.0-85133815864