Price volatility characteristic of bond with embedded option, Financial Management

Assignment Help:

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


Related Discussions:- Price volatility characteristic of bond with embedded option

Research and development and marketing costs, a) Product orientated busines...

a) Product orientated businesses tend to be produce products and inward looking that they hope will sell in the marketplace. For example, Sony hoped that its $101,500 audio systems

#titApplicability of an operating cycle, Discuss the applicability of an op...

Discuss the applicability of an operating cycle in cabbage growing business in Uganda.

Conversion ratio, It is the number that tells how many common stock...

It is the number that tells how many common stocks (or preference stocks) will the bondholder receive at the time of conversion. It is usually constant over

Pension fund management: a global perspective, Pension Fund Management: A G...

Pension Fund Management: A Global Perspective Pension funds are known worldwide more for their social security element. They have assumed more importance from the day the priva

Financial decision, Should a company pursue price hike or focus on increasi...

Should a company pursue price hike or focus on increasing sales volume

#title.OPERATING CYCLE, DISCUSS THE APPLICABILITY OF OPERATING CYCLE IN VEG...

DISCUSS THE APPLICABILITY OF OPERATING CYCLE IN VEGETABLE GROWING.

Cost of redeemable preference share capital, Q. Cost of Redeemable Preferen...

Q. Cost of Redeemable Preference Share Capital? Cost of Redeemable Preference Share Capital: - Redeemable preference capital has to be returned to the preference shareholders s

Calculate the annual revenue - capital budgeting analysis, The Donut Shop, ...

The Donut Shop, Inc. is planning to add a 2nd Donut Shop by opening a new store across from Webster University. A survey of the area has already been completed at a cost of $150,00

Determine the net present value, The following information pertains to Fair...

The following information pertains to Fairways Driving Range, Inc.: The company is considering operating a new driving range facility in Sanford, FL. In order to do so, they wi

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd