Components of a callable bond, Financial Management

A callable bond is the sale of a call option by the investor to the issuer as it allows the issuer to repurchase the bond from the time it becomes callable until the maturity date. The purchaser of a callable bond effectively enters into two transactions:

  1. Purchase of a non-callable bond for which they pay some price.

  2. Sale of a call option to the issuer for which they receive the option price from him.

The net price paid by a callable bondholder is given by,

         Value of the callable bond   =       Value of the non-callable bond - Value of the call option. 

It can be seen in Figure 1 that the difference between the price of the non-callable bond and the callable bond is the price of the embedded call option. Though we have simplified the situation for explanatory purposes, in practice it is not easy to define the price of a callable bond like this. The issuer may call the bond at the first call date or any time thereafter or any subsequent coupon anniversary. Thus, the investor has sold a strip of call options to the issuer. The price of the call option may vary with the date the option is exercised by the issuer. But it is always easier to describe the investor's position as a combination of a long position in non-callable bond and a short call option.

Posted Date: 9/10/2012 7:10:30 AM | Location : United States







Related Discussions:- Components of a callable bond, Assignment Help, Ask Question on Components of a callable bond, Get Answer, Expert's Help, Components of a callable bond Discussions

Write discussion on Components of a callable bond
Your posts are moderated
Related Questions
Explain the Post-acquisition integration plan Post-acquisition integration plan Keep  all  channels  of communications open,  by  includin

Working capital cycle for a trade Inventories days (time inventories are held before being sold)   Plus   Trade receivables days (how long

a recent business school graduate, you work directly for the corporate treasurer. Your corporation is going to issue a new security plan and is concerned with the probable flotatio


1. Why do you think you are asked to perform valuation given an array of discount rates? a. Would it not be more accurate to utilize, for example, CAPM to calculate cost of equi

Eurodollar U.S. currency held on deposit in banks located outside the United States, mainly in Europe. Eurodollars are mostly used for settling international transactions outs

#questThe managing directors of three profitable listed companies discussed their companies'' dividend policies at a business lunch. Company A; has deliberately paid no dividends

In 1952, to provide equilibrium between assets and liabilities of insurance companies, Frank Redington, an English actuary, proposed interest rate immunization te

Explain the meaning of Buy-ins This  is  when  third  party  management  team  make  a  takeover  bid  and  then  run  business themselves. Finance sources are same as to buy-o

Q. Describe about Accountants Report? Accountants' Report - Formal document which communicates an independent accountant's: (1) expression of limited assurance on FINANCIA