Valuing a callable bond using binomial model, Financial Management

Assignment Help:

The process of valuing a callable bond is similar to that of an option-free bond, except for one thing - when the call option may be exercised by the issuer, the bond value at a node must be changed to reflect the lesser of its values if it is not called and the call price. For illustration purpose, let us consider a 5.5% bond with four years remaining to maturity, that is, callable in one year at $99. Table 1 shows two values at each node. The first value is calculated considering the bond as an option-free bond and the second value is based on whether the issue will be called or not. We can clearly see how the cash flows will be effected if the issuer exercises the option to call.

Table 1: Valuing a Callable Bond

785_valuing callale bond.png


Related Discussions:- Valuing a callable bond using binomial model

Differentiate between systematic and unsystematic risk, QUESTION a) Dis...

QUESTION a) Discuss the importance of diversification in the context of stock markets using appropriate numerical illustrations. b) Mimine and Minush are two companies with

Introduction to fixed income portfolio management strategies, Investors use...

Investors use two management strategies to manage their fixed income portfolios. They adopt either active management strategy or passive management strategy. A

Compare and contrast a forward contract and an option, QUESTION (a) Bri...

QUESTION (a) Briefly define foreign exchange rate risk and the three different types of exchange rate risks (b) Identify and outline the different methods of internal and ex

Securities and exchange commission (sec), SEC is the Regulatory body for...

SEC is the Regulatory body for investor protection in the United States which is created through the Securities Exchange Act of 1934.

Budget classification on the basis of functions, ON THE BASIS OF FUNCTIONS ...

ON THE BASIS OF FUNCTIONS •Functional / Subsidiary budgets: A subsidiary budget is a budget of income or expenditure appropriate to or the responsibility of functions, like

Auction technique, Auction Technique Auction is the most common method ...

Auction Technique Auction is the most common method to sell Government Securities. Other methods include tap sales, syndication and book building process. Presently many countr

Commercial paper, Commercial Paper (CP) is a short-term unsecured pro...

Commercial Paper (CP) is a short-term unsecured promissory note issued in the open market. It also represents the obligation of the issuer. Normally, it is issued

WEALTH.., What is the fastest way to be rich?

What is the fastest way to be rich?

Factors affecting working capital needs of firms, FACTORS AFFECTING WORKING...

FACTORS AFFECTING WORKING CAPITAL NEEDS OF FIRMS A large no. of reasons influences the working capital requirements of firms.  a number of them are as follows: 1. Nature of

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