19 Pages Posted: 21 Aug 1998
Date Written: 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.
JEL Classification: G12, E43
Suggested Citation: 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