Timeline for How would I value a perpetual bond with an embedded option?
Current License: CC BY-SA 3.0
5 events
| when toggle format | what | by | license | comment | |
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| Jul 15, 2019 at 14:42 | comment | added | Homunculus Reticulli | Sorry it took me almost 8 years to accept your answer. This must be a record surely! :) | |
| Jul 15, 2019 at 14:41 | vote | accept | Homunculus Reticulli | ||
| Dec 1, 2011 at 14:37 | comment | added | Brian B | The BDT model is, despite its age, still one of the most common models employed for pricing callable bonds. In this case you would need to modify it with a jump to default branch on the trees corresponding to your credit risk. The accounting step of recording $X$ on the books is a convenience, as actual instrument value is more dependent on what someone else is willing to pay and hence depends on their perception of how risky your credit is. | |
| Dec 1, 2011 at 10:34 | comment | added | Homunculus Reticulli | I agree with this answer intuitively - although I must admit that I don't exactly understand your answer. My understanding of your answer is that the instrument should be valued as a perpetual bond (with an embedded option) and recorded at Notional value $X (is my understanding correct?). If yes, then it seems that the instrument I described is really, a callable "perpetual" bond?. It is still not clear to me how to price the instrument - could you please be more explicit?. Its been a while since I did any FM/pricing stuff so please bear with me being slow .. | |
| Nov 30, 2011 at 21:30 | history | answered | Brian B | CC BY-SA 3.0 |