Valuation of embedded options in non-marketable callable bonds: a new numerical approach

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dc.contributor.authorSkalický, Romancs
dc.contributor.authorZinecker, Marekcs
dc.contributor.authorBalcerzak, Adam Przemyslawcs
dc.contributor.authorPietrzak, Michał Bernardcs
dc.contributor.authorRogalska, Elzbietacs
dc.coverage.issue4cs
dc.coverage.volume28cs
dc.date.accessioned2022-08-10T14:52:16Z
dc.date.available2022-08-10T14:52:16Z
dc.date.issued2022-07-24cs
dc.description.abstractThe issue of how to price options embedded in callable bonds has attracted a lot of interest over the years. The usual bond valuation methods rely on yield curves, risk premium, and other parameters to estimate interest rates used in discounted cash flow calculations. The option to retire the bond is, however, neglected in the standard pricing models, causing a systematic overvaluation of callable bonds. In the event of a decline in interest rates, investors are exposed to the risk of a lower return on investment than indicated by the yield to maturity. We propose a novel approach to valuing the risk that the issuer will use the right to buy back the bond at a specific call price. While prior models are focused on valuing marketable callable bonds, we deliver a unique approach to valuing bonds with an embedded European option (or a multiple option) that are traded solely through private transactions. These can typically be characterized by the lack of historical records on transaction prices. The modular character of calculation we propose allows us to take into account additional information, such as probable behaviour of the issuer, available opportunities for achieving alternative earnings or different estimates in terms of interest rate development.en
dc.formattextcs
dc.format.extent1115-1136cs
dc.format.mimetypeapplication/pdfcs
dc.identifier.citationTechnological and Economic Development of Economy. 2022, vol. 28, issue 4, p. 1115-1136.en
dc.identifier.doi10.3846/tede.2022.17060cs
dc.identifier.issn2029-4913cs
dc.identifier.other178771cs
dc.identifier.urihttp://hdl.handle.net/11012/208227
dc.language.isoencs
dc.publisherVilnius Gediminas Technical Universitycs
dc.relation.ispartofTechnological and Economic Development of Economycs
dc.relation.urihttps://journals.vilniustech.lt/index.php/TEDE/article/view/17060cs
dc.rightsCreative Commons Attribution 4.0 Internationalcs
dc.rights.accessopenAccesscs
dc.rights.sherpahttp://www.sherpa.ac.uk/romeo/issn/2029-4913/cs
dc.rights.urihttp://creativecommons.org/licenses/by/4.0/cs
dc.subjectnon-marketable callable bondsen
dc.subjectoptions embedded in bondsen
dc.subjectembedded options valuationen
dc.subjectoption pricingen
dc.subjectbond pricingen
dc.subjectloss of interest incomeen
dc.subjectinterest rate volatilityen
dc.subjectprobability of callen
dc.titleValuation of embedded options in non-marketable callable bonds: a new numerical approachen
dc.type.driverarticleen
dc.type.statusPeer-revieweden
dc.type.versionpublishedVersionen
sync.item.dbidVAV-178771en
sync.item.dbtypeVAVen
sync.item.insts2022.08.10 16:52:15en
sync.item.modts2022.08.10 16:14:22en
thesis.grantorVysoké učení technické v Brně. Fakulta podnikatelská. Ústav ekonomikycs
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