A Methodological Approach for the Valuation of Callable Bonds in Emerging Markets: The TGI Example

Cuadernos de Administración, 23(40): 271-294.

27 Pages Posted: 13 May 2008 Last revised: 22 Dec 2014

See all articles by Edgardo Cayon Fallon

Edgardo Cayon Fallon

Colegio de Estudios Superiores de Administracion

Julio Sarmiento-Sabogal

Pontificia Universidad Javeriana

Date Written: 2010

Abstract

The purpose of this paper is to clarify some of the difficulties that a practitioner may find in implementing the binomial model for valuing a corporate bond with multiple embedded options in emerging markets. Especially, when faced with the dilemma of determining which should be the proxy variables for the risk-free rate, sovereign risk and country specific risk. In order to clarify some of the challenges that the practitioners face, the paper will present the reader a practical example that can serve as a guide through the required steps needed to value a callable bond in an emerging market. The callable bond used in this example is issued by the Transportadora de Gas del Interior International Ltd., which is a company located in Colombia and its economic activity is the transportation of natural gas and has four embedded call options by the issuer until its final maturity in October 3, 2017. Our conclusion is that by using the binomial model to find the option adjusted spread of the bond is also possible to find a more reliable measure of specific or unique risk attributable to the company economic activities.

Keywords: Valuation, Callable bonds, Country risk, OAS, Binomial pricing Model, Not callable Bonds, Specific Risk, Emerging Markets

JEL Classification: C10, E4, G12, G13, G15

Suggested Citation

Cayon Fallon, Edgardo and Sarmiento-Sabogal, Julio, A Methodological Approach for the Valuation of Callable Bonds in Emerging Markets: The TGI Example (2010). Cuadernos de Administración, 23(40): 271-294., Available at SSRN: https://ssrn.com/abstract=1132763 or http://dx.doi.org/10.2139/ssrn.1132763

Edgardo Cayon Fallon (Contact Author)

Colegio de Estudios Superiores de Administracion ( email )

Calle 35 No. 6-16
Bogota
Colombia

Julio Sarmiento-Sabogal

Pontificia Universidad Javeriana ( email )

Carrera 7 # 40-62 Piso 4
FCEA-Depto de Administración
Bogota, D.C. 00001
Colombia
(57-1)3208320 ext 3156 (Phone)
(57-1)3208320 ext 3169 (Fax)

HOME PAGE: http://www.javeriana.edu.co/decisiones/Julio

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