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Finance and Financial Management Commons

Open Access. Powered by Scholars. Published by Universities.®

Social and Behavioral Sciences

Singapore Management University

2020

Bespoke Bermudan option

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Bermudan Option In Singapore Savings Bonds, Kian Guan Lim Jul 2020

Bermudan Option In Singapore Savings Bonds, Kian Guan Lim

Research Collection Lee Kong Chian School Of Business

The Singapore Savings Bonds (SSB) is a unique investment program offered by the Singapore government whereby retail investors can earn risk-free tax-free step-up interest closely matched to Treasury bond rates for up to 10 years and can redeem on any business day prior to maturity without any early redemption penalty. This study analyses the unique design of the SSB and provides a valuation of the Bermudan option for early redemption that is embedded in the SSB. The Black-Derman-Toy model is used to build the interest rate tree, and an iterative method is employed to avoid arbitrary specification of the pre-determined …