Search results
Results From The WOW.Com Content Network
By issuing numerous callable bonds, they have a natural hedge, as they can then call their own issues and refinance at a lower rate. The price behaviour of a callable bond is the opposite of that of puttable bond. Since call option and put option are not mutually exclusive, a bond may have both options embedded. [3]
Research the terms: The first step when buying callable bonds is researching the terms. Every issuer has different terms. Every issuer has different terms. Consider call protection and call price.
Bonds of this type include: Callable bond: allows the issuer to buy back the bond at a predetermined price at a certain time in future. The holder of such a bond has, in effect, sold a call option to the issuer. Callable bonds cannot be called for the first few years of their life. This period is known as the lock out period.
The price of the call contract must act as a proxy response for the valuation of: the expected intrinsic value of the option, defined as the expected value of the difference between the strike price and the market value, i.e., max[S−X, 0]. [3] the risk premium to compensate for the unpredictability of the value
Yield to put (YTP): same as yield to call, but when the bond holder has the option to sell the bond back to the issuer at a fixed price on specified date. Yield to worst (YTW): when a bond is callable, puttable, exchangeable, or has other features, the yield to worst is the lowest yield of yield to maturity, yield to call, yield to put, and others.
Securities other than bonds that may have embedded options include senior equity, convertible preferred stock and exchangeable preferred stock. See Convertible security. [citation needed] The valuation of these securities couples bond-or equity-valuation, as appropriate, with option pricing. For bonds here, there are two main approaches, as ...
A reverse convertible security is a type of convertible security where a bond or short-term note can be converted to cash, debt or equity at a set date by the issuer based on an underlying stock. In effect it is a type of option on the maturity date where the bond can be converted to shares or cash.
Bond valuation is the process by which an investor arrives at an estimate of the theoretical fair value, or intrinsic worth, of a bond.As with any security or capital investment, the theoretical fair value of a bond is the present value of the stream of cash flows it is expected to generate.