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Fixed-income instrument pricing

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  • ilya, gikhman

Abstract

In this article we discuss the fundamentals of pricing of the popular financial instruments. The basic point of our approach is to extend the present value benchmark concept. The present value valuation approach plays the similar role as The Newton Laws in the Classic Mechanics. Thus our primary goal is to present a new outlook on valuation of the debt securities and its derivatives. We also, demonstrate why the present value is not a complete method of pricing either securities or derivatives. Then, as illustration we present a valuation of the floating rate, callable and convertible bonds. Next we discuss major drawbacks of the risk neutral interpretation of the derivatives pricing. At the end of the article we discuss interest rate swap and derivative valuation of some classes of the fixed income securities.

Suggested Citation

  • ilya, gikhman, 2006. "Fixed-income instrument pricing," MPRA Paper 1449, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:1449
    as

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    File URL: https://mpra.ub.uni-muenchen.de/1449/1/MPRA_paper_1449.pdf
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    References listed on IDEAS

    as
    1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    2. Robert Jarrow, 2017. "Derivatives," World Scientific Book Chapters, in: THE ECONOMIC FOUNDATIONS OF RISK MANAGEMENT Theory, Practice, and Applications, chapter 3, pages 19-28, World Scientific Publishing Co. Pte. Ltd..
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Bond; coupon bond; present value; floating rate bond; convertible; callable bond; interest rate swap; options valuation; risk neutral probabilities; interest rate derivatives;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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