Exact Analytical Valuation of Bonds when Spot Interest Rates are Log-Normal
Asbjorn T. Hansen
Dresdner Kleinwort Benson; University of Aarhus
Peter Løchte Jørgensen
University of Aarhus - Business and Social Sciences
July 15, 1998
We present an analytical formula for zero-coupon bond prices in a one-factor term structure model where the spot interest rate follows a log-normal diffusion. The pricing formula is implemented via a recursive algorithm which is easily coded and which is extremely fast. Illustrative numerical examples are provided and comparisons with results from industry standard Monte Carlo simulations are made. These comparisons support the effectiveness of our proposed algorithm.
Number of Pages in PDF File: 19
JEL Classification: G12, E43
Date posted: August 21, 1998
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