Pricing Callable Bonds Based on Monte Carlo Simulation Techniques

Deng Ding, Qi Fu, Jacky So

aculty of Science and Technology, University of Macau, Macao, China.
Faculty of Business Administration, University of Macau, Macao, China.

DOI: 10.4236/ti.2012.32015                

Abstract

In this paper, a Monte Carlo method, which is based on some new simulation techniques proposed recently, is presented to numerically price the callable bond with several call dates and notice under the Cox-Ingersoll-Ross (CIR) interest rate model. The corresponding algorithms are also presented to practical callable bond pricing. The numerical experiments show that this method works very well for callable bond under the CIR interest rate model.

Keywords

Callable Bond; Monte Carlo Simulation; CIR Model; Embedded Option Pricing

Conflicts of Interest

The authors declare no conflicts of interest.

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