Forums  > Pricing & Modelling  > Callable Bonds (Fxd for Life, Float for Life, Fxd to Float)  
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Total Posts: 1
Joined: May 2017
Posted: 2017-05-25 20:16
Hello guys

I am new to this forum.

During the last couple of months the callable bond topic has dominated US investment grade corporate bond markets with many financial companies issuing various forms of callable bonds. Regultory aspects (e.g. TLAC funding) have been driving this form of funding. Banks have used different styles of callable bonds, e.g. Fixed for Life Coupon bonds, Floating Rate Notes or Fixed to Float (where the Fixed Coupon turns into a Floating Coupon if the bond isnt called). The first call date usually appears one year before maturity (some bonds are european style, some are bermudian or american style options). Still some industrial companies issue bonds with a longer call structure (Transcanada has most recently issued a 60NC10 bond 60 years maturity if the bond is not called after 10y).

Since I am new to the topic of pricing callables in general, I was wondering whether somebody could help me out with any useful comments or literature references. How should we compare the different styles? What kind of interets rate models should be used to price those bonds? What kind of numerical methods should be used?... In case I have missed relevant posts then I am sorry

Thanks very much and best regards


Total Posts: 9
Joined: Aug 2017
Posted: 2017-09-05 16:15
This generally depends on the side of the transaction that you are on. The buy-side and sell-side have different things they care about, and thus, different models.

Also of note is the applicability of no-arbitrage pricing--is it possible to break out a bond into just its embedded option components and assert that these options are priced fairly? If no-arbitrage assumptions are not there, that makes a strong case against using pricing models like Hull-White or Black-Derman-Toy.

Also, there's term structure issues that come into play here. In practice (and this is speaking from experience on sell-side origination), mean reversion models aren't very useful on bonds with maturities
I think some color as to your objective could be helpful in getting steered in the right direction.


Total Posts: 373
Joined: Mar 2005
Posted: 2017-09-16 00:18
Try and focus first on the rationale for the issuance because that has a large bearing on how the FI market prices the securities.

There's a world of difference from a straight senior, unsecured bond of say 5y tenor with a European par call 3 months prior to maturity (re-finance flexibility) to a capped FRN (investor rates outlook for upfront LIBOR margin increase) vs a corporate hybrid security with all manner of structures.

I say this because FI cash dealers ALL ignore the senior 3-6m maturity call, almost most ignore the FRN caps (this is a bit 2005 but still), and almost everyone prices to a redemption (call) on the float step up from fixed etc.

Learn the market structure/technicals first...

I am unaware of a bank risk system that models embedded bond options (properly/at all). The one caveat is structured notes usually traded by Rates Exotics who do model the rates risk really well but generally blow up every three years because they forget the primary risk is issuer credit but they're Rates traders...

"Yeh, after that blow out I bid the bonds at 76 and you hit man...You're 77/81 now? Cool man...What? Do I care at 80? No mate... I'm 73 bid now...I'm sure you didn't just load up just for me...".


Total Posts: 1
Joined: Mar 2018
Posted: 2018-03-21 21:41
First you need to select a term structure model from a number of popular ones, such as LMM, HJM, LGM, QGM or Hull-White. Secondly you need to select a numeric approach, e.g., tree, lattice, PDE or Monte Carlo. Then you can value a callable bond via a backward conduction. Since you ask for reference, this paper provides you more details and some practical recommendations.


Total Posts: 3448
Joined: Jun 2004
Posted: 2018-03-21 22:31
there is a typo :
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