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

Total revenue change, Write an essay explaining that the quantities of good...

Write an essay explaining that the quantities of goods and services that we can produce are limited by both our available resources and by technology. Assume we want to increase

Answer, The standard cost of chemical mixture ~ PQ’ is as follows: 40% of m...

The standard cost of chemical mixture ~ PQ’ is as follows: 40% of material P @ Rs. 400 per kg. 60% of material Q @ Rs. 600 per kg. A standard loss of 10% is normally anticipated in

Security offered - influence the rate of interest, Q. Security offered -  ...

Q. Security offered -  influence the rate of interest ? The rate of interest charged on the loan will be lesser if the debt is secured against an asset or assets of the company

LPP, A paper mill produces two grades of paper viz., X and Y. Because of ra...

A paper mill produces two grades of paper viz., X and Y. Because of raw material restrictions, it cannot produce more than 400 tons of grade X paper and 300 tons of grade Y paper i

Capital structure, name the concept which increases the return on equity sh...

name the concept which increases the return on equity shares by changing the capital structure of the co.

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

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

Secondary market - t-bills, Secondary Market The major participants in ...

Secondary Market The major participants in secondary market are banks, brokerage firms and bond houses. They buy and sell T-bills on behalf of customers and themselves. The cus

Risk and return, I need report on Risk and Return. Do you provide help in t...

I need report on Risk and Return. Do you provide help in topic Risk and Return? I need expert's assistance to solve my college assignment. Please suggest if it works for me.

Differences between indirect costs and direct costs, a) Variable costs: Rem...

a) Variable costs: Remuneration of flight attendants, Meals and drinks onboard, Fuel. Fixed costs: promotions and Advertising, Remuneration of administrative staff and Airport c

Report on the valuation of endess, Q. Report on the valuation of Endess? ...

Q. Report on the valuation of Endess? Ideally the valuation must be based upon the present value of incremental cash flows that result from the buy-in but in practice this data

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