A Defaultable Bond Of Corporation Pricing Under The Condition Of Random Interest Rate

Credit risk management of financial derivatives is a hot issue in the field of today’sinternational financial. As the core of the financial derivatives, bond becomes the focus oftheoretical research. Defaultable bond pricing is one of the most important topics to besolved.In this paper, we discussed the zero coupon corporation bonds and their derivativespricing by using the reduced form model. Different from the former method in which thedefault process always follows the diffusion model, this article mainly has carried on theresearch work of the following two aspects:Firstly, by promoting Borovkov’s interest rate model with credit risk, we proposed aninterest rate model based on a compound Cox point process model, assuming defaultintensity and stochastic interest rate are related. By using the special properties of theLaplace functional, we deduced a simple no-arbitrage price expression of the zero couponbonds. Further more, we deduced the price of its derivatives under the same assumption.Secondly, We conclude by considering a special case of our model and use simulationtechniques to verify the expression we obtained for the defaultable bond price. Numericalillustrations are presented by using Monte Carlo method.