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http://ssrn.com/abstract=110773
 
 

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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


Abstract:     
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

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Date posted: August 21, 1998  

Suggested Citation

Hansen, Asbjorn T. and Jørgensen, Peter Løchte, Exact Analytical Valuation of Bonds when Spot Interest Rates are Log-Normal (July 15, 1998). Available at SSRN: http://ssrn.com/abstract=110773 or http://dx.doi.org/10.2139/ssrn.110773

Contact Information

Asbjorn T. Hansen
Dresdner Kleinwort Benson
20 Fenchurch Street
London EC3P 3DB
United Kingdom
University of Aarhus ( email )
Dept. of Operations Research
DK-8000 Aarhus C
Denmark
Peter Løchte Jørgensen (Contact Author)
University of Aarhus - Business and Social Sciences ( email )
Finance Research Group
Fuglesangs Allé 4
DK-8210 Aarhus, 8210
Denmark
+4587165117 (Phone)
HOME PAGE: http://www.asb.dk/~plj
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