Bonds with embedded put options, Financial Management

Assignment Help:

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.


Related Discussions:- Bonds with embedded put options

Financial asseta and time value of money, assume that risk free rate is 8% ...

assume that risk free rate is 8% and expected rate of return in market is 12%. what is the required rate of return on stock with a beta of 0.8%

Lien, A legal claim on exact assets which were used to make loan secure.

A legal claim on exact assets which were used to make loan secure.

Price-yield relationship of a callable bond, The price-yield relation...

The price-yield relationship of a non-callable or a non-putable bond is convex because price and yield are inversely proportional. Figure 1 shows the price-yield

Explain in-quote-driven according to trade intermediation, Explain about th...

Explain about the in-quote-driven according to trade intermediation. In quote-driven dealer markets, a market-maker or dealer is onto one side of each trade. (Remember that dea

Historical look at the treasury yield curve, The minimum interest rate ...

The minimum interest rate which investors demand for non-treasury securities is represented by the yield offered on the treasury securities. This is why market particip

Benefits of the proposed policy change, Q. Benefits of the proposed policy ...

Q. Benefits of the proposed policy change? Short-term sources of debt finance comprise overdrafts and short-term loans. An overdraft offers elasticity but since it is technical

What is the ratios based on historic cost accounts, What is the Ratios base...

What is the Ratios based on historic cost accounts Ratios based on historic cost accounts don't give a true picture of trends, due to the effects of inflation and different acc

Protected put, Protected Put A protected put would involve a long put a...

Protected Put A protected put would involve a long put and a long stock. For example - ONGC. Underlying stock = Rs. 809 Buy Mar Rs. 900 Put @ Rs.68.8   Total cos

Discuss the process of maximise profits, Discuss the process of  Maximise ...

Discuss the process of  Maximise Profits Let's first look at profit maximisation.  Profit (also known as net income or earnings) canbe defined as the amount a business earns af

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