Valuation and duration of callable bonds , Financial Management

Assignment Help:

A callable bond is similar to an Option-free bond with a call option from the bondholder. It can be thought of as 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 the callable bondholder is given by,

         Price of the callable bond = Price of the non-callable bond

                                                             - Price of the call option.

         Value of callable option = Value of an option-free bond

                                                           - Value of a call option on the bond.                  


Related Discussions:- Valuation and duration of callable bonds

Breaks in specific cost of capital, Breaks in Specific Cost of Capital: Th...

Breaks in Specific Cost of Capital: The specific costs of capital may also be affected by the amount of finance the firm wants to raise. As the amount of financing increases, the

Types of asset-backed securities, Types ...

Types of asset-backed securities 1.  Auto Loan-Backed Securities (ALBs) 2.  Credit Card Receivab

Significant performance indicators, Significant Performance Indicators ...

Significant Performance Indicators   Following are the most commonly used performance indicators used to assess the financial, and general health of any company:   Gro

Reinvestment risk, Reinvestment risk is the risk involved in reinvesting th...

Reinvestment risk is the risk involved in reinvesting the proceeds received from the issuer against callable bonds. During falling interest rate periods, investor canno

Fundamentals of structured product engineering, Fundamentals of Structured ...

Fundamentals of Structured Product Engineering 1. (a) Let r m denote the m month swap rate (or Libor rate). Subsequently the 3 × n month forward rate f (3 ×n )

Explain the term- operating segments, Operating segments An operating s...

Operating segments An operating segment is a component of an organisation It engages in business activities from that it can earn revenues and incur expenses(this also c

Market-based versus bank-based financial systems, What do you meant by mark...

What do you meant by market-based and bank-based financial systems? Market-based versus bank-based financial systems implications. The presence of market-based and bank-base

Give new marketing strategy, a) B2C businesses provide goods and services t...

a) B2C businesses provide goods and services to the general public, i.e. consumers. HMV sell music, books and DVDs (via Waterstones) to private individuals and can therefore be cla

Explain about routine functions, Q. Explain about Routine Functions? Ro...

Q. Explain about Routine Functions? Routine Functions: - The routine functions are Supervision of cash receipts and payments. Opening Bank Accounts as well as managing them Saf

Monte-carlo simulation model and option adjusted spread, We have seen...

We have seen the valuation of bonds with embedded option using binomial model. This method can be used when cash flows do not depend on how interest rates evolve.

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