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

Important areas of personal financial management, Gary and Joyce Yau, both ...

Gary and Joyce Yau, both 30, last month bought their dream house in London, Ontario. The purchase price was $450,000 plus addition fees such as taxes, legal fees, administration fe

Objectives of cash management, Q. Objectives of Cash Management? (i) To...

Q. Objectives of Cash Management? (i) To sustain Optimum Cash Balance: - The major objective of cash management is to determine the optimum cash balance required in the busines

Calculate the net income-asset intensity-return on assets, Analyze a Startu...

Analyze a Startup How would you select an organizational form for a business? Think about this question as you read the following scenario. Joe Jones has created a business

Show inter-corporate deposits, Q. Show Inter-Corporate Deposits? Inter-...

Q. Show Inter-Corporate Deposits? Inter-Corporate Deposits: Inter-corporate lending/borrowing or deposits (ICDs) is a popular short-term investment alternative for companies in

What is affiliated company, Q. What is Affiliated Company? Affiliated C...

Q. What is Affiliated Company? Affiliated Company - Company or other organization related through common ownership,common control of management or owners or through some other

Find out the current stock price, Great Pumpkin Farms just paid a dividend ...

Great Pumpkin Farms just paid a dividend of $3.50 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely.  Investors require a 16 p

Define the constructive receipt, Q. Define the Constructive Receipt? Co...

Q. Define the Constructive Receipt? Constructive Receipt - A taxpayer is considered to have received income even though monies are not in hand, it may have been set aside or ot

What can financial institution often do for deficit econmic, What can a fin...

What can a financial institution often do for a deficit economic unit (DEU) that it would have difficulty doing for itself if the DEU were to deal directly with an SEU? SEUs us

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