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Firm and Corporate Bond Valuation: A Simulation Dynamic Programming Approach

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Author Info
Augusto Castillo
Abstract

This paper analyzes corporate bond valuation of a straight bond, and the convertibility feature, when interest rates are stochastic and the firm value is determined by the interaction of a series of stochastic variables. The sensitivity of the corporate debt value to some key parameters is also explored. The methodology applied here is based on a hybrid of simulation and dynamic programming proposed by Raymar and Zwecher in 1997 to value financial American-type options. This methodology proves to be extremely efficient to value American-type options when the sources of uncertainty are numerous.

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Publisher Info
Article provided by Instituto de Economía. Pontificia Universidad Católica de Chile. in its journal Cuadernos de Economía.

Volume (Year): 41 (2004)
Issue (Month): 124 ()
Pages: 345-360
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Handle: RePEc:ioe:cuadec:v:41:y:2004:i:124:p:345-360

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Related research
Keywords: Valuation; Options; Bond; Equity;

Find related papers by JEL classification:
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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