THE VALUATION OF BONDS AND BOND OPTIONS: SOME EMPIRICAL TESTS

We thank Andrea Cividini for Marquardt’s algorithm and Gianluca Salsecci for his helpful sugges-tions. This paper has been prepared for the “International Workshop on Large-Scale Economic and Financial Applications: New Tools and Methodologies ” held in Urbino (May 10th, 1991). SUMMARY This paper presents a general method for valuing fixed rate bonds and options written on them. In the first part, of a theoretical nature, we present valuation formulae, derived within the framework of the Cox, Ingersoll and Ross (CIR) model, both for bonds and for European options written on bonds (with and without coupons) and yields. We recall the theoretical parity of put and call options. In the second part we describe a procedure that can be used to estimate the CIR model using the prices of riskless coupon bonds. Lastly, we describe the valuation of bonds denominated in three different cur-rencies and of the options implied in some Italian government securities