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Is there any way to price American Callable Bonds (those which can be called on any date before expiration) other than basic CRR interest rate trees, since they won't be accurate enough to give satisfactory results like they do on European Callable Bonds.

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  • $\begingroup$ Are these risky bonds (so, a credit component as well) or govies / IG bonds? The appropriate model will depend on the calibration instruments you use. In the best case, you would want to use bond yield volatility - from quoted bond options, if available. Also, I presume these would be fixed-rate bonds as floaters won't have much of an option value as they trade near par. Fixed rate govies / IG bonds could use general swaption / cap-floor vol surface, idealy in a Libor Market Model implementation. The short rate models are harder to fit exactly to the market, and hence have serious limitations. $\endgroup$ – bhutes Jun 13 at 2:28

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