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

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

Banking sector securities, The banking sector has a vital and active ...

The banking sector has a vital and active role in the money market. The transactions taking place in these securities are large in size, both in terms of volumes

What do you signify by cash, Q. What do you signify by Cash? Cash :- Fo...

Q. What do you signify by Cash? Cash :- For the motive of cash management the term cash not only includes cheques, bank drafts, coins, currency, notes, demand deposits with ban

Define the negative consequences of a company holding, What are the negativ...

What are the negative consequences of a company holding too much cash? A company holding so much cash would be giving up the opportunity to invest much more in income producing a

Equity instruments, QUASI-INSTRUMENTS These instruments are considered ...

QUASI-INSTRUMENTS These instruments are considered as debt instruments for a time-frame and are converted into equity at the option of the investor (or at company's option) aft

Medium-term notes (mtns) , Medium-term notes are debt instrumen...

Medium-term notes are debt instruments that can be offered continuously to an investor. An agency of the issuer offers these; and these are avai

Financial evaluation and decision making, Financial Evaluation and Decision...

Financial Evaluation and Decision Making: The final major element of financial management is the evaluation of the information provided through the accounting and budget proces

Factors determining dividend policy, Q. Factors Determining Dividend Policy...

Q. Factors Determining Dividend Policy? (1) Financial Needs of the Firm: - Financial requirement of a firm are directly related to the investment opportunities available to it.

Jit inventory control system primary recuirement, What are the primary requ...

What are the primary requirements for a successful JIT inventory control system? For a JIT system to be victorious the supplier must be willing and able to deliver materials im

Seed financing, It's a small amount of money which is used for initial mark...

It's a small amount of money which is used for initial market research or product development for a new venture.

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