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I would like to understand if there is a way to imply the option value from the bond price for a callable bond. I understand the mechanics of calculation of the worst yield in the presence of many call dates(price to yield for each date being a maturity) but is there way to imply how much the option worth in each case?

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    $\begingroup$ Callable riskless bond price = noncallable bond - call option. Use standard option valuation methodology and use sum-of-the-parts to achieve your objective. $\endgroup$
    – Kch
    Commented Jul 19, 2021 at 21:48
  • $\begingroup$ @Kch that means I have to create a model to compute option price. What if I need to calibrate my model? Is there some idea how those parts are valued implied from the prices and workout dates I observe? In particular, assume I computed the smallest yield for a given price is the bond was called at T_best for a given price X. Does it give me any additional information about the split up between bullet and option? $\endgroup$
    – Medan
    Commented Jul 20, 2021 at 1:27
  • $\begingroup$ Same procedure to calibrate. Break up the parts on reference securities and extract a vol surface from those $\endgroup$
    – Kch
    Commented Jul 21, 2021 at 15:45

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