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I need to price a floating rate callable bond in Excel. I am new to this and struggling to find good information on this specific situation.

I have several rate scenarios until maturity, i.e. the reference rate for each period going forward, so the coupons are essentially known for each scenario and I would probably just build a toggle to switch between scenarios. I also have current price, the margin and call price, and cost of senior debt and equity.

However I don't really understand how to build this model since there is A LOT of different information out there. The coupon is paid quarterly and the bond can also be called quarterly. I don't get how to price the call option, and I am not sure what to use for discount rate. I also don't get how the yield-to-call factors in, and how it works with multiple call dates, considering it can be called every 3 months from now until maturity.

So far, while trying to understand it, this is what I've done: built out a schedule of payments if the bond is not called early, and payments for each period if the bond is called that period.

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  • $\begingroup$ Among other things, you should include the bond issuer's credit in your analysis. What is the probability that the bond issuer will default at various points in time? If there's a default, how much recovery will the bond holders receive? If the bond is paying $L+S_0$, and at some time $t$ the issuer can borrow for $L+S_t$, will they call if $S_0<S_t$? If $S_0>S_t$? $\endgroup$
    – Dimitri Vulis
    Commented Feb 22 at 19:50
  • $\begingroup$ Thank you Dimitri! But do you have advice on how to go about pricing the call option? $\endgroup$
    – Yury
    Commented Feb 22 at 22:48
  • $\begingroup$ And also what discount rate would be appropriate to use? $\endgroup$
    – Yury
    Commented Feb 22 at 23:03
  • $\begingroup$ Bielecki+Rutkowski may help academia.edu/66276159/… , doi.org/10.1111/j.1467-9965.2008.00345.x $\endgroup$
    – Dimitri Vulis
    Commented Feb 23 at 3:01

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