Author(s)

Vince Hooper¹, John Pointon²

¹School of Economics and Management, Xiamen University Malaysia, Kuala Lumpur, Malaysia.
²University of Plymouth, Plymouth, UK.

This paper models the value of callable Eurobonds, using stochastic calculus, by assuming that the exchange rate follows a geometric Brownian motion process and the arrival time of an early redemption of the bond by the issuer conforms to a negative exponential distribution. The solution to the stochastic model shows that there is a relationship between the call premium and the expected time to the call which is consistent with traditional Black-Scholes pricing formulae. The magnitude of the call premium can be viewed as a signal to the market on a Government treasury’s or company’s expectations about the future level of interest rates and possible refinancing strategies. This paper is unique because as of July 2019 there exists no attempt at valuing Callable Eurobonds in the research literature.

Stochastic Calculus, Callable Eurobonds, Term to Maturity, Poisson Distribution, Negative Exponential, Geometric Brownian Motion, Call Feature, Refinancing Strategy

Hooper, V. and Pointon, J. (2019) A Valuation Model for Callable Eurobonds. Journal of Mathematical Finance, 9, 394-401. doi: 10.4236/jmf.2019.93023.