Determining the call option value, Financial Management

The effective maturity of a callable bond can be anywhere between the first call date and its maturity date due to the presence of the call feature.

A callable bond is similar to an Option-free bond with a call option from the bondholder. Value of a callable bond is therefore the value of an option free bond minus the value of the call option.

Value of callable option  =      Value of an option-free bond - Value of a call option on the bond.

We have already seen the calculation of value for an option-free bond and the value of a callable bond. The difference between both the values will give the value of the call option. In our illustration, the value of the option-free bond is $100.714. If the call price is $99, each year and the value of the callable bond with an assumed volatility interest of 10% is $100.123, then value of the call option is $0.501.

Posted Date: 9/10/2012 7:03:02 AM | Location : United States







Related Discussions:- Determining the call option value, Assignment Help, Ask Question on Determining the call option value, Get Answer, Expert's Help, Determining the call option value Discussions

Write discussion on Determining the call option value
Your posts are moderated
Related Questions
Advantages and disadvantage of pacipatory style of budgeting

Q. What is the significance of Working Capital? Meaning of Working Capital: - Working capital management is an significant aspect of financial management. In business money is

How are financing costs generally incorporated into the capital budgeting analysis process? Financing costs are typically captured in the discount or hurdle rate when doing IRR

What is the operating leverage effect and what causes it?  What are the potential benefits and negative consequences of high operating leverage? The operating leverage effect i

Financial Reports: Each person has their own perception on what a particular financial report should contain, and invariably in what they consider to be the important factors w

One of the well-known soccer clubs in Australia, Sydney, has made a decision to include its players on the club's statement of financial position as assets. These players are signe

Role of Custodians The Securities and Exchange Board of India on 5th May, 1996, through its notification No.S.O.344 (E) has issued the SEBI (Custodian of Securities) Regulation

Define risk. Examine the need for assessing the risks in a project

Q. Determine Earnings per share? Current earnings per share = 100 × (4550 - 225)/ 5000 = 86.5 cents Earnings per share after one year = 100 × (4508 - 225)/ 5000 = 85.7 cents

Project your company's income statement and assets for five years. Identify your assumptions for major categories. Determine how you will finance your balance sheet (long-term de