Abstract

http://ssrn.com/abstract=260407
 
 

References (6)



 


 



Heterogeneous-Expectations Model of the Value of Bonds Bearing Call Options


Zvi Bodie


Boston University - Department of Finance & Economics

Benjamin M. Friedman


Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

December 1977

NBER Working Paper No. w0218

Abstract:     
This paper develops a dynamic programming model of the optimal refunding strategy and the corresponding value of a callable bond. The model differs from previous work on this subject primarily in that it explicitly admits the possibility of differences between the issuer's expectations of future interest rates and an investor's corresponding expectations. This generalization facilitates the application of the model to determine what a specific bond (issued, for example, by a particular corporation) is worth to any given investor. Additional analytical features of the model, which differ from corresponding aspects of some previous models, include the use of a stochastic discounting rate and the use of continuous distributions to characterize the relevant interest rate expectations. For the bond issuer, his own expectations (together with the bond's coupon and call features) suffice to indicate the critical refunding yield as well as the expected value of the bond in each time period until the bond matures. For an investor, however, the analytical solution of the model and the illustrative numerical examples presented in the paper show that the issuer's expectations and the investor's own both matter if the two differ.

Number of Pages in PDF File: 45

working papers series


Download This Paper

Date posted: May 20, 2004  

Suggested Citation

Bodie, Zvi and Friedman, Benjamin M., Heterogeneous-Expectations Model of the Value of Bonds Bearing Call Options (December 1977). NBER Working Paper No. w0218. Available at SSRN: http://ssrn.com/abstract=260407

Contact Information

Zvi Bodie (Contact Author)
Boston University - Department of Finance & Economics ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-4160 (Phone)
617-353 6667 (Fax)
HOME PAGE: http://smgnet.bu.edu/mgmt/profiles/BodieZvi.html
Benjamin M. Friedman
Harvard University - Department of Economics ( email )
Littauer Center
Room 127
Cambridge, MA 02138
United States
617-495-4246 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Feedback to SSRN


Paper statistics
Abstract Views: 762
Downloads: 22
References:  6

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo4 in 0.344 seconds