Price volatility characteristic of bond with embedded option, Financial Management

Assignment Help:

The price of the embedded option comprises two components. The first is the value of the same bond assuming it has no embedded option (option-free bond), the second part is the value of the embedded option.

The two very common embedded options are call and put options. Under call option, the issuer has right to call or prepay the bonds and issuer may do this when interest rate decreases. In put option, bondholder or investor has right to return the bonds to the issuer for pre-decided price and investor may do this when interest rate increases. Now let us look into the price/yield relationship for both types of embedded options.

Figure 1: Price/Yield Relationship for a Callable Bond and an Option-Free Bond                         

2080_price volatility characteristics.png


Related Discussions:- Price volatility characteristic of bond with embedded option

Explain the checklists -documenting the accounting system, Checklists or qu...

Checklists or questionnaires Audit firm will have a standard list of control questions. Audit staff can quickly ascertain which if any, are in operation by the client. There

Powerpoint, Individual Project Due Date: Mon, 06/08/15 Points Possible: 100...

Individual Project Due Date: Mon, 06/08/15 Points Possible: 100 Deliverable Length: 8-10 slides with speaker notes Description: You are the CFO of a 400-bed hospital in Texas

Compute the expected return and standard deviation, Question: Consider ...

Question: Consider the following information:   Stock A Stock B Beta 0.8 1.4 Share price, $

Partnership, Par tnership A legally authorized business form in wh...

Par tnership A legally authorized business form in which two or more partners are co-owners, sharing profits, losses, and liabilities related with the business they own.

What is allocation registers, Q. What is Allocation Registers? The obje...

Q. What is Allocation Registers? The object of allocation register is keep the heads of department of divisions districts and regions informed of the progress of expenditure by

Why is the replacement value of assets method, Why is the replacement value...

Why is the replacement value of assets method not generally used to value complete businesses? The replacement value of assets method isn't often applied to entire business val

What is dependent care expenses, Q. What is Dependent Care Expenses? De...

Q. What is Dependent Care Expenses? Dependent Care Expenses - Qualified child care expenses would allow a taxpayer this computed credit against tax. Amounts can be found on the

Evaluate the income statement, 2010 equity balance required: (600-20 - 2...

2010 equity balance required: (600-20 - 25 - 15 - 20)= 520 employees eligible Total expected equivalent value = 520 x 500 options x $1.48 = $384,800 $384,800 x 3/4 years = $28

Explain sunk cost and opportunity cost in npv, In the NPV analysis, sunk co...

In the NPV analysis, sunk cost is not relevant whereas opportunity cost is for project evaluation. Requirements: Explain and justify the above statement about sunk cost and

Working capital management, Q. Working capital management? Every busine...

Q. Working capital management? Every business needs funds for the two purposes for its establishments and to carry out day to day operations. Long terms funds are required to c

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