Bonds and Options Valuation Using a Conditioning Factor Approach

This paper looks at methods to calculate prices (or approximate prices) of bonds (zero coupon as well bearing) where the interest rates follow a log-normal distribution using two different waysthe first method makes use conditioning variable similar approach Basu (1999) and Rogers Shi (1995), while second (only applicable in case zero - bond case) is by making direct expansion technique. The factor based then used price (in fact lower bound bond) for carrying both non-defaultable defaultable ones. Finally, value European options on assets with stochastic volatility. not one numerical solutions partial differential equations but rather an approximation option that can be arrived approach. As shown tables end paper, results obtained quite accurate some cases it exactly equal true themselves.