Posted by
Luigi Ballabio on
URL: http://quantlib.414.s1.nabble.com/callable-bonds-tp9638p9640.html
On Mon, 2007-07-23 at 12:19 +0000, John Maiden wrote:
> Allen-
>
> Maybe I'm missing something here, but wouldn't a
> callable fixed rate bond be similar to a convertible bond?
> All you have to do is make it a European option and then
> set the conversion ratio so small that it will never be
> converted at the final time.
Yes, in principle; but the current implementation of convertible bonds
builds an equity tree and uses deterministic interest rates. This
approximation works if variations in the equity value have a much bigger
effect on price than variations in the interest rates. If you take the
convertibility away, the assumption breaks down.
Later,
Luigi
--
Greenspun's Tenth Rule of Programming:
Any sufficiently complicated C or Fortran program contains an
ad-hoc, informally-specified bug-ridden slow implementation of
half of Common Lisp.
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