Modelling Callable Annuity Bonds with Interest-Only Optionality

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dc.contributor.author	Holst, Anders	en_US
dc.contributor.author	Nalholm, Morten	en_US
dc.date.accessioned	2009-02-04T10:26:14Z
dc.date.available	2009-02-04T10:26:14Z
dc.date.issued	2004-11-02T00:00:00Z	en_US
dc.identifier.isbn	8790705823	en_US
dc.identifier.uri	http://hdl.handle.net/10398/7149
dc.description.abstract	In this paper an investigation of the pricing of callable annuities with interest-only (I-O) optionality is conducted. First the I-O optionality feature of callable annuities is introduced. Next an algorithm for pricing callable annuities with I-O optionality using the finite difference methodology, is formulated. This is then used to investigate optimal strategies of I-O bonds and impacts on prices from the I-O optionality. It is found that the I-O feature necessitates a simultaneous valuation of all elements of the callable I-O bond. Following this, the Greeks of the I-O bond are investigated. It is found that they are affected by the I-O feature, but only to a limited extent. Finally, a model of heterogenous prepayment decisions is incorporated into the framework. The model is extended to model heterogeneity in the I-O exercise decisions. The incorporation of heterogeneity in borrower decisions is found to lead to reasonable causalities.	en_US
dc.format.extent	47 s.	en_US
dc.language	eng	en_US
dc.relation.ispartofseries	Working paper;2004-006	en_US
dc.subject.other	kep	en_US
dc.title	Modelling Callable Annuity Bonds with Interest-Only Optionality	en_US
dc.type	wp	en_US
dc.accessionstatus	modt04nov02 miel	en_US
dc.contributor.corporation	Copenhagen Business School. CBS	en_US
dc.contributor.department	Institut for Finansiering	en_US
dc.contributor.departmentshort	FI	en_US
dc.contributor.departmentuk	Department of Finance	en_US
dc.contributor.departmentukshort	FI	en_US
dc.idnumber	8790705823	en_US
dc.publisher.city	København	en_US
dc.publisher.year	2004	en_US