Bonds with embedded put options, Financial Management

Put option is the right of the investor which he may exercise on the date at the put price given in the indenture. Normally, put price is in par value. When yield rises such that the bond's value falls below the put price, then investor will exercise the put option.

The value of putable bond is equal to the value of option-free bond plus the value of the put option. Therefore, the value of embedded option is equal to the difference between the value of a putable bond and the value of comparable option-free bond. 

Figure 1: Price/Yield Relationship for a Putable Bond and an Option-Free Bond

990_bond with embedded put options.png

Figure 1 shows that curve a - b' and a - a' shows the price/yield relationship of a putable bond and option-free bond respectively. When yield is lower than the coupon rate then price of the putable bond is same as option-free bond because the value of the put option is small. As interest rate increases the price of the putable bond declines but decrease in price is less when compared to that of option-free bond.  For a given yield level, the difference between the price of putable bond and comparable option-free bond is the value of a put option.

Posted Date: 9/10/2012 5:07:43 AM | Location : United States







Related Discussions:- Bonds with embedded put options, Assignment Help, Ask Question on Bonds with embedded put options, Get Answer, Expert's Help, Bonds with embedded put options Discussions

Write discussion on Bonds with embedded put options
Your posts are moderated
Related Questions
Explain cash flow and funds flow analysis with suitable example from an existing corporate entity for at least three years i.e. 2008, 2009.2010.

Q. Example on compound value of the single flow? Mr. X invests Rs. 1000 at 10% is compounded yearly for three years. Compute value after three years. FV = PV (1+i) n FV

Suppose, you are working as an investment consultant in a consultancy firm and most of your clients are habitual investors, who are maintaining their own portfolios comprising of v

All the bonds are not making periodic coupon payments. Zero-coupon bonds are those bonds where the bondholder realizes interest by buying it at a deep discount to its face

Exit strategy Venture capitalists and other financiers will negotiate an exit strategy at the point of advancing the money. The exit strategy will involve them realising their

Q. Function of the Investment decision? Investment decision related of the selection of the fixed assets. the assets can be acquired fall into two board groups i) long terms

• Prepare a Trend Analysis for the Balance Sheet, Income Statement and Cash Flow Statement • This should include about 12 accounts in the Balance Sheet and about 10 Income Statemen

Valuation The process of finding out the current value of an asset or company is known as valuation. There are various techniques that can be utilized to find value, few are su

This case has been framed in order to test the skills in evaluating a credit request and reaching a correct decision. Perluence International is large manufacturer

A futures contract is a contract to purchase (and sell) a particular asset at a fixed price in a future time period. There are two parties for every futures contract - the seller o