A Pull-to-Par Binomial Model for Pricing Options on Bonds

Abstract

We present a tree-based approach to the Pull-to-Par model for call options on zero-coupon bonds presented in Tomas and Yu (2021). The binomial approach presented is a simple alternative to the original model solution. The model presented converges to the stochastic process given in Tomas and Yu. Some illustrative comparison values to the original model for calls and puts are given. A discussion of American option pricing and the addition of coupons is also presented and illustrated.