eduzhai > Physical Sciences > Physics Sciences >

A Valuation Model for the Variable Rate Demand Obligation

  • Save

... pages left unread,continue reading

Document pages: 6 pages

Abstract: In this paper, a valuation framework is developed for the variable rate demand obligation (VRDO). The VRDO is a class of floating rate note whose coupon rate changes on a regular basis and is “puttable” by the bondholder, given a notice of one week to the issuer. We model the coupon rate as a geometric Brownian motion process and assume that the incidence of puts is Poisson distributed, across time. Put events are assumed to be brought about by factors such as a change in the liquidity and consumption preferences of investors or a change in a Municipal issuer’s creditworthiness. This paper is unique because as of July 2019 there exists no attempt at valuing VRDOs in the research literature.

Please select stars to rate!


0 comments Sign in to leave a comment.

    Data loading, please wait...