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On the Determinants of the Value of Call Options on Default-Free Bonds

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  • Stephen A. Buser
  • Patric H. Hendershott
  • Anthony B. Sanders

Abstract

Models of interest-dependent claims that imply similar term structures and levels of interest rate volatility also produce similar estimates of bond option values. This result is established for simple option forms with known closed-form solutions as well as for more complex options that require numerical methods for evaluation. The finding is confirmed for a wide range of economic conditions, and it is robust with respect to the number and nature of factors that generate interest-rate movements.

Suggested Citation

  • Stephen A. Buser & Patric H. Hendershott & Anthony B. Sanders, 1988. "On the Determinants of the Value of Call Options on Default-Free Bonds," NBER Working Papers 2529, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2529
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    References listed on IDEAS

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    1. Gultekin, N Bulent & Rogalski, Richard J, 1985. "Government Bond Returns, Measurement of Interest Rate Risk, and the Arbitrage Pricing Theory," Journal of Finance, American Finance Association, vol. 40(1), pages 43-61, March.
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    6. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    7. Courtadon, Georges, 1982. "The Pricing of Options on Default-Free Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(1), pages 75-100, March.
    8. Oldfield, George S, Jr & Rogalski, Richard J, 1981. "Treasury Bill Factors and Common Stock Returns," Journal of Finance, American Finance Association, vol. 36(2), pages 337-350, May.
    9. Patric H. Hendershott, 1985. "Pricing Adjustable Rate Mortgages," NBER Working Papers 1548, National Bureau of Economic Research, Inc.
    10. Stephen A. Buser & Patric H. Hendershott & Anthony B. Sanders, 1985. "Pricing Life‐of‐Loan Rate Caps on Default‐Free Adjustable‐Rate Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 248-260, September.
    11. Stephen A. Buser & Patric H. Hendershott, 1984. "The Pricing of Default-Free Mortgages," NBER Working Papers 1408, National Bureau of Economic Research, Inc.
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