#TITLE_ALTERNATIVE#

• Main Author: GUNAWAN (NIM 20806005); Pembimbing : Dr. Muhammad Syamsuddin, RONALD
• Format: Theses
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/14460
• Institution: Institut Teknologi Bandung

The value of a bond depends on two things : the term structure of interest rate and the probability of bankruptcy. This thesis discuss about the way to determine the value of a risky bond by decomposing its value using the foreign exchange analogy. With this analogy, we can determine bond's value by two different things : expected payoff ratio and the discounted interest rate payoff. At first, we are going to develop a discret model consist of two periods of transaction. In this model, we can easily see the movement of interest rate, bankruptcy process, and bond's value. We can also determine the value of options whose value depends on the value of risky bond. One of the development of the discret model is the continuous one. In this model, we assume that the forward rate follows a continuous Brownian motion with certain drift. With this assumption, we can derive the model of risk-free and risky bond movement. With risk-neutral valuation, we can determine the value of option on risky debt as a closed solution of risk-free bond value and parameters from the bankruptcy process. To determine the value of a risk-free bond, we will use the Ho-Lee's binomial method using the data provided in the market. This model assumes that the interest rate of small period of time can either go up or down with certain probabilities, but the expectation dan variation is always adjusted to the real world data. Bond or option value is the discounted expected value of the return on these interest rates under risk-neutral probabilities.