Search results
Results From The WOW.Com Content Network
The call price is the price the issuer can call the bond, usually at the par price. Buy the bond: Once you buy the bond, its terms begin. The investment will grow at the specified interest rate.
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]
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 ...
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.
Types of bonds more likely to be affected by reinvestment risk: Callable bonds, short-term bonds, zero-coupon bonds, mortgage-backed securities and asset-backed securities. 4. Liquidity risk
Extendible bond (or extendable bond [1]) is a complex bond with the embedded option for a holder to extend its maturity date by a number of years. [ 2 ] [ 3 ] Such a bond may be considered as a portfolio of a straight, shorter-term bond and a call option to buy a longer-term bond.
Option values vary with the value of the underlying instrument over time. 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]
For example, many bonds are convertible into common stock at the buyer's option, or may be called (bought back) at specified prices at the issuer's option. Mortgage borrowers have long had the option to repay the loan early, which corresponds to a callable bond option.