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It's because of a bank regulation called the Liquidity Coverage Ratio. This says that if you have liabilities of less than 30 days, you have to hold liquid assets against it. To avoid that , you can call the bond when it still has 3 months to go.


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Clarity suggestion: "Yield" on a callable bond is ambiguous. You should specify yield to call, yield to maturity, or yield to worst (often YTW=YTC). A callable bond has a price that consists of the noncallable bond less the premium (n.b. option premium, not bond premium!) paid by the borrower for the option to call in the bonds. Options have a ...


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When a bond issuer calls a bond, they give a notice, typically 30 calendar days, but sometimes 45 or 60 etc. The number of notice days can usually be found in the bond's prospectus. The calls can be European (callable on one date), Bermudan (callable on a list of dates, which usually coincide with coupon dates), or American (callable on or anytime after some ...


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The strike in these examples is the clean price. If a bond is called, then the bond holder receives the strike plus the accrued interest. It's exactly as if the bond hold sold the bond in the secondary market for clean price = strike. Bonds are frequently issued to be callable at par in the last few months of their lives for convenience: the issuer expects ...


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Discretisation schemes If you want to simulate the path, then common practice is to sample from the exact distribution, as for the CIR process this is known. The distribution can be found from the original CIR process (1985). However, this requires sampling from a non-central $\chi^2$-distribution, which can be very expensive, and a bit more difficult to ...


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In the area that I'm familiar with, options on MBS TBAs, as commented by Dimitri, there don't appear to be any standard models. Among other reasons, this is probably due to a lack of liquidity in the sector (there are very few market makers) and the fact that any such mortgage option model will show some dependence on the prepayment model/OAS pricing ...


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When a corporate bond is called, the corporation is purchasing it's own bonds from existing bond holders. Corporate bonds are typically t+2 settlement. The bonds were called on t (trade date) and no longer trading after this date, the issue is still outstanding until they are settled on t+2 (Sept 28). The corporation owns the bonds as of the call effective ...


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You get yield to maturity (YTM) - the yield assuming the calls are not exercised even if they are in the money. According to the master himself http://quantlib.10058.n7.nabble.com/Yield-to-call-for-callable-bonds-td17004.html there's no straighforward way. One workaround would be to instantiate a second bond with maturity equal to the callability date ...


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The yield is the internal rate of return of the coupons and the principal repayment. For a floater, the future unset coupons are not known, and the value of the yield depends a lot on how you project them, making the yield less stable than DM. On Bloomberg terminal, for example, there is a setting for how to project a floater's coupons. The default is to ...


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A common approach is to build a credit curve from noncallable issues if available, and then run your lattice or monte carlo on that using volatilities from interest rate derivatives market possibly adjusted. I have heard however that that approach doesnt do a great job hitting market prices, and there are more complex models which involve more explicit ...


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