Abstract
The Singapore Savings Bonds (SSB) is a unique investment program offered by the Singapore government whereby retail investors can earn risk-free tax-free step-up interest closely matched to Treasury bond rates for up to 10 years and can redeem on any business day prior to maturity without any early redemption penalty. This study analyses the unique design of the SSB and provides a valuation of the Bermudan option for early redemption that is embedded in the SSB. The Black-Derman-Toy model is used to build the interest rate tree, and an iterative method is employed to avoid arbitrary specification of the pre-determined short rate volatility function. This bespoke Bermudan option can have changing strike prices over time. It also has a novel characteristic whereby the value of exercise to a buyer need not equal to the cost of being exercised to a seller. Better understanding of embedded options within government savings bonds leads to innovative designs that may encourage effective citizens' savings.