Kisoeb Park, Journal of Internet Computing and Services, Vol. 25, No. 2, pp. 93-99, Apr. 2024
10.7472/jksii.2024.25.2.93, Full Text:  HTML
Keywords: Term-Structure Interest Rate, Bond Price, Monte carlo simulation, algorithm

Abstract

In this paper, we derive the Partial Differential Bond Price Equation (PDBPE) by using Ito’s Lemma to determine the pricing of bond on term-structure of interest rate (TSIR) model with jump. From PDBPE, the Maclaurin series (MS) and the moment-generating function (MGF) for the exponential function are used to obtain a numerical solution (NS) of the bond prices. And an algorithm for determining bond prices using Monte Carlo Simulation (MCS) techniques is proposed, and the pricing of bond is determined through the simulation process. Comparing the results of the implementation of the above two pricing methods, the relative error (RE) is obtained, which means the ratio of NS and MCS. From the results, we can confirm that the RE is less than around 2.2%, which means that the pricing of bond can be predicted very accurately using the proposed algorithms as well as numerical analysis. Moreover, it was confirmed that the bond price obtained using the MS has a relatively smaller error than the pricing of bond obtained by using the MGF.

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