Chap18Notes

Chap18Notes - Bonds With Embedded Options An embedded...

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1 Bonds With Embedded Options An embedded option gives either the issuer or the bond holder the option – but not the obligation – to change the expected future cash flows of a bond. The common types of embedded option: Call Option : A callable bond is a bond in which the bondholder has sold the issuer an option – a call option – that allows the issuer to repurchase the contractual cash flows of the bond, at a predetermined price, called the call price , from the time the bond is first callable until the maturity date Bonds With Embedded Options (Continued) Put Option : A putable bond is a bond in which the bondholder has the right to sell the bond back to the issuer at a predetermined price – usually at the par value of the bond. Convertible Option : A convertible bond is a bond where the bondholder has the right to convert or exchange the bond for a predetermined number of shares of common stock of the company. Valuation of Callable Bonds The owner a callable bond can be viewed as someone who has a position in two separate contracts: 1. A contract that provides the bondholder with the periodic coupon payment over the remaining life of
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Chap18Notes - Bonds With Embedded Options An embedded...

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