Valuing a Bond with an Embedded Option

[gazhoo]

Question: finding the value of a bond at each node…is the method to do this always done by “backward induction”?

 

[Charis]

Yes.
It is not possible to value such a bond otherwise (at least in the scope of level 2). Be reminded, however, that path-dependent securities (MBS and Real estate ABS) should be valued with the OAS approach (with Monte Carlo simulation).

 

[vicky_cool400]

FI the terror