Convex upper and lower bounds for present value functions

In this paper we present an efficient methodology for approximating the distribution function of the net present value of a series of cash-flows, when discounting is presented by a stochastic differential equation as in the Vasicek model and in the Ho-Lee model. Upper and lower bounds in convexity order are obtained. The high accuracy of the method is illustrated for cash-flows for which no analytical results are available. Copyright (C) 2001 John Wiley & Sons, Ltd.