Exact Analytical Valuation of Bonds when Spot Interest Rates are Log-Normal

19 Pages Posted: 21 Aug 1998  

Asbjorn T. Hansen

Dresdner Kleinwort Benson; University of Aarhus

Peter Løchte Jørgensen

University of Aarhus - Business and Social Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: 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.

JEL Classification: G12, E43

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: https://ssrn.com/abstract=110773 or http://dx.doi.org/10.2139/ssrn.110773

Asbjorn T. Hansen

University of Aarhus ( email )

Dept. of Operations Research
DK-8000 Aarhus C
Denmark

Dresdner Kleinwort Benson

20 Fenchurch Street
London EC3P 3DB
United Kingdom

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://pure.au.dk/portal/en/plj@econ.au.dk

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