This paper makes use of an integrated benchmark modeling framework that allows us to derive term structure equations for bond and forward prices. The benchmark or numeraire is chosen to be the growth optimal portfolio (GOP). For deterministic short rate the solution of the bond term structure...

We derive consistent contingent-claims models for valuing implicit options embedded in structured notes, and use them to compare the cost of fixing the spread with that of fixing the price in bond tender offers. We analyze 289 bond tender offers and find that the cost difference is economically...

This chapter surveys the literature on fixed-income pricing models, including dynamic term-structure models, and interest-rate sensitive, derivative pricing models. Our overview of conceptual approaches highlights the tradeoffs that have emerged between the complexity of the probability model...

We develop a structural bond pricing approach and implement it on a large panel of US industrial bonds using an efficient maximum likelihood methodology. We evaluate the model's ability to predict yield spread levels and changes out-of-sample. Errors are smaller and distinctly less variable than...

A new type of structured bond has recently been introduced with enormous success–primarily among private investors–in many countries in Europe. The bonds are medium term and with fixed and very high initial coupons. The remaining coupons are determined as a constant multiplier times the...

Securitization of the rainfall risk involves pooling of the rainfall contingent insurance policies to issue financial instruments in the capital markets to transfer the rainfall risk from the insurers to the investors. Low income households, especially in the developing countries like India...

n this paper we present a model for valuing European and American options, which incorporates both default and interest rate risks. We develop a framework that permits evaluation of three kinds of options: (i) options issued by default-free counterparties on risky bonds, (ii) options issued by...

This paper develops a discrete-time two-factor model of interest rates with analytical solutions for bonds and many interest rate derivatives when the volatility of the short rate follows a GARCH process that can be correlated with the level of the short rate itself. Besides bond and bond...

This paper proposes closed-form solutions for pricing credit-risky discount bonds and their European call and put options in the intensity-based reduced-form framework, assuming the stochastic dynamics of both the risk-free interest rate and the credit-spread are driven by two correlated Ho-Lee...