Pricing Options Embedded in Corporate Bonds Using the Binomial Method

• Published in: Econometric research in finance : ERFIN Vol. 8; no. 2; pp. 53 - 67
• Main Author: Liu, Qi
• Format: Journal Article
• Language: English
• Published: SGH Warsaw School of Economics, Collegium of Economic Analysis 31.12.2023
• Subjects: Binomial Method; Callable Bond; Embedded Option; Geometric Brownian Motion; Noncallable Bond; Short Rate

It is common for a corporate bond to include a call provision that gives the issuing company an option to call, or redeem, the bond at some prespecified set of call prices before the stated maturity date. Since the option is embedded in the bond, it is not traded publicly and thus its value is unkno...