A Terminal Condition in Linear Bond-pricing Under Symmetry Invariance

Abstract

In this paper, we examine a general bond-pricing model with respect to its solutions that satisfy a given terminal condition. Firstly, we obtain reversible transformations that change the model to a classical and well known partial differential equation, the one dimensional heat equation. We further show that the terminal condition is transformed into a nonsmooth initial condition. The important result that emerges is that the Lie symmetries are adopted to solve the equation subject to its unique configuration of initial conditions.