Price volatility characteristic of bond with embedded option, Financial Management

The price of the embedded option comprises two components. The first is the value of the same bond assuming it has no embedded option (option-free bond), the second part is the value of the embedded option.

The two very common embedded options are call and put options. Under call option, the issuer has right to call or prepay the bonds and issuer may do this when interest rate decreases. In put option, bondholder or investor has right to return the bonds to the issuer for pre-decided price and investor may do this when interest rate increases. Now let us look into the price/yield relationship for both types of embedded options.

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

2080_price volatility characteristics.png

Posted Date: 9/10/2012 4:13:32 AM | Location : United States

Related Discussions:- Price volatility characteristic of bond with embedded option, Assignment Help, Ask Question on Price volatility characteristic of bond with embedded option, Get Answer, Expert's Help, Price volatility characteristic of bond with embedded option Discussions

Write discussion on Price volatility characteristic of bond with embedded option
Your posts are moderated
Related Questions
In the telecom industry of the Australia, these are some most important organizations such Vodafone Austrelia‎, TransACT Capital Communications, Optus, and Telstra. Vodafone A

List and describe the three career opportunities in the field of finance? Finance has three key career paths: financial markets and institutions, financial management and inves

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

A yield spread between any two bond issues can be easily computed when the maturity date for both these issues is same. The yield spread between these two bond

Q. Explain about Book Value Weights? Book Value Weights: - Book value weights are calculating form the values taken from the balance sheet. The weight to be assigned to every s

Explain the term- Maturities Debentures are sometimes grouped by length of time till maturity that existed on the date debenture was first issued.  Money Market Securities matu


The Final Project for this module is a consultancy report to Anthony’s Orchard, an expanding apple orchard and distributor. The company has been entertaining the idea of expanding

What are the assumptions of MM(Modigliani Miller) approach?

How competitive is the market for banking services? A: With above 7,000 banks and thrifts in the U.S., banking is one of the so many competitive industries in the world. Refer