Determinants of the Value of Call Options of Default-Free Bonds.

The fundamental determinants of the value of an option on a bond are the level and slope of the term structure and the level of interest-rate uncertainty. Competing models that have been developed to price bond options produce similar estimates as long as those models are conditioned on similar values for the fundamental determinants. This result is established for simple options with known closed-form solutions and for more complex options that require numerical methods for evaluation. The finding is confirmed for a wide range of economic conditions, and it is shown to be robust with respect to the number and nature of factors that generate interest-rate movements. Copyright 1990 by the University of Chicago.