The Valuation of Puttable Bonds: An Application of the Cox, Ingersoll and Ross Model to Italian Treasury Option Certificates

The Italian Treasury’s puttable bonds (Certificati del Tesoro con opzione di rimborso anticipato - CTOs) are the first example in Italy of retractable/extendible bonds, which have been used on the Canadian market for some time and recently been adopted on the Euromarket. In this paper the single-factor version of the Cox, Ingersoll and Ross model is used to determine the equilibrium value of CTOs at issue. The simulation of the effects of changes in their features provides useful information on the optimal design of CTOs.