Implementation of an Option Pricing-Based Bond Valuation Model for Corporate Debt and Its Components

This paper describes the binomial option pricing-based bond value estimation procedure used in our study, “Option Pricing-Based Bond Value Estimates and a Fundamental Components Approach to Account fro Corporate Debt.” (Barth et al. 1998). That study provides evidence on the relevance and reliability of option pricing-based value estimates for bonds and their components, i.e. conversion, call, put, and sinking fund provisions. Although the proper study provides a brief overview of the models’s implementation , i.e. how to estimate total bond and component values, the objective of this paper is to provide a fuller set of details to permit the model’s implementation by others’ , including other researchers and financial statement prepares. We also aim to enhance their understanding of option pricing based debt and component valuation.