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In this post we will consider how the Black-Derman-Toy (BDT) short rate binomial tree will be used to price options on bonds. Pricing Options The BDT model may also be used to price put or call options on bonds. For the purpose of calculating these
In this post we will consider how the Black-Derman-Toy (BDT) short rate binomial tree will be used to price bonds. Pricing Bonds For example, we illustrate the use of the short rates to price a hypothetical 3-year fixed income bond at issue as follows: Using
Earlier we had looked at how the Black-Derman-Toy (BDT) interest rate model may be constructed in EXCEL. In particular we saw how the median rates and time varying volatilities (sigmas) of the short rate binomial tree were derived. In this post we will see how
Earlier we had considered how to define the various elements (input, output and calculation cells) of the Black-Derman-Toy (BDT) interest rate model in EXCEL. In this post we will link all these pieces together by using the Solver Function of the EXCEL worksheet. Once this