A Valuation of Bond Guarantees by the Risky Guarantor Using Contingent Claims Analysis Regression Approach

Abstract

This paper examines a model to estimate the value of bond

guarantees by employing the risk neutral valuation approach. We

examine the valuation of bond guarantees both by a risky guarantor

and by a riskless guarantor. We discuss the valuation of bond

guarantees by a bank as an example of guarantees by a risky

guarantor. As an example of bond guarantees by a riskless guarantor,

we present the valuation of bond guarantees by government. Numerical

examples are shown to gain insight into the relative effects of changes

in the various parameters on the values of bond guarantees.