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Bridge over ocean
1 January 1996 Financial Analysts Journal Volume 52, Issue 1

Pricing Long Bonds: Pitfalls and Opportunities

  1. Philip H. Dybvig
  2. William J. Marshall

Valuing long claims has always been important for immunizing portfolios used to find long obligations such as certain defined-benefit pension payments. Recent bond issues such as Disney's 100-year bonds emphasize the need to value long-maturity fixed claims accurately. Because of the subtleties of convexity, parameter uncertainty, and the impact of default risk, the value of long-maturity bonds is easy to underestimate. Formal analysis of the pitfalls in pricing long bonds and the correct pricing that points to investment opportunities reveals large errors that can arise from the usual intuitive arguments using the expectations hypothesis and point estimates of unknown parameters.

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