OPTIONS ON BONDS presented, discount, burning, original, only

grharmeyer

I know how to value an option on a bond using backwards induction

But I am wondering, is the method presented in the CFAI curriculum only valid for options on risk free bonds?

Because for a risky bond, to value it at any node in the tree you would need to discount at the rate in the original tree+OAS, while for the payoff of the option you would discount that at the rate without the OAS because you assume a risk nuetral portfolio...

Ugh, I might just be burning out, this was never a problem the first 400 times I read the curriculum.

RepoToronto

400 times? doubtful. You're thinking too hard. Just do what they say to do.