Re: [Quantlib-dev] callable bonds

[Luigi B. <lui...@gm...>]

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


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