Valuation of Callable/Putable Corporate Bonds in a One-Factor LogNormal Interest-Rate Model

Posted: 6 Aug 2020 Last revised: 11 Jan 2021

See all articles by Robert S. Goldberg

Robert S. Goldberg

Adelphi University - School of Business

Ehud I. Ronn

University of Texas at Austin - Department of Finance

Liying Xu

Spears School of Business

Date Written: June 25, 2020

Abstract

Whereas the callable-bond market used to emphasize primarily public debt - Government Agencies, and both investment grade and non-investment corporate debt - that has changed dramatically over the past twenty years, in part due to the low prevailing rates of interest as well as some systematic changes in the Agency sector. While some Agency and investment grade corporate bonds are still extant, there are more numerous callable bonds of lower ratings categories. In delivering a theoretically-sound practical model, one that does not call for computation or use of an "option-adjusted spread" (OAS), this paper seeks to use a one-factor LogNormal interest-rate model to calibrate the implied-vols of callable and putable bonds in the U. S. bond market, and to relate those implied volatilities to measures of time to call, time from call to maturity, moneyness and the credit-yield spread.

Keywords: Valuation of Callable and Putable Bonds; Implied Yield Volatilities

JEL Classification: G12, G13

Suggested Citation

Goldberg, Robert S. and Ronn, Ehud I. and Xu, Liying, Valuation of Callable/Putable Corporate Bonds in a One-Factor LogNormal Interest-Rate Model (June 25, 2020). Available at SSRN: https://ssrn.com/abstract=3647507 or http://dx.doi.org/10.2139/ssrn.3647507

Robert S. Goldberg

Adelphi University - School of Business

Garden City, NY 11530
United States

Ehud I. Ronn (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Graduate School of Business
Austin, TX 78712
United States
512-471-5853 (Phone)
512-471-5073 (Fax)

Liying Xu

Spears School of Business ( email )

700 North Greenwood
Tulsa, OK 74106
United States
918-594-8667 (Phone)

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