Call Features and Term to Maturity of Callable Foreign Bonds
Faculty of Economics & Commerce and Economics Program, Research School of Social Sciences, Australian National University, 1996 - Bonds - 10 pages
This paper models the value of "embedded" options in foreign bonds, using stochastic calculus, by assuming that the exchange rate follows a geometric Brownian motion process and the arrival time of an early redemption of the bond by the issuer conforms to a negative exponential distribution. The solution to the stochastic model shows that there is a relationship between the call premium and the expected time to the call. Therefore, the magnitude of the call premium can be viewed as a signal to the market on the firm's or a government treasury's expectations about the future level of interest rates and possible refinancing strategies.
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1995 Glenn Jones 1996 Vince Hooper Auctions Australia Black-Scholes bond in sterling Bond Option bond price BOND VALUATION MODEL Brennan and Schwartz Brownian motion process Brxdt call date Call Features call premium call price call value callable bonds Callable Foreign Bonds Courtadon December 1995 Glenn Economic Elizabeth Savage equations 21 exchange rate follows expected term face value Features and Term Finance Financial and Quantitative Flavio Menezes follow a Poisson follows a geometric FOREIGN BOND VALUATION future refinancing strategies geometric Brownian motion gxdt Hooper & John interest rates issuer John Pointon John Quiggin Journal of Financial July 1996 Vince Maturity of Callable Mauer November 1995 Robert Optimal Call Policy P.F. Apps paper Poisson distribution Poisson process Pricing of Options redemption during dt Simon Grant spot exchange rate State-contingent Production stochastic calculus stochastic processes strategies by setting structure of interest Term Structure term to maturity term to redemption transaction costs yield curve