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

#WACC, Filer Manufacturing has 8.9 million shares of common stock outstandi...

Filer Manufacturing has 8.9 million shares of common stock outstanding. The current share price is $59, and the book value per share is $4. Filer Manufacturing also has two bond is

Visible venture capital, It is the organized and established firms that con...

It is the organized and established firms that constitute the venture capital industry.

OPERATING CYCLE, DISCUSS THE APPLICABILITY OF AN OPERATING CYCLE TO APOULTR...

DISCUSS THE APPLICABILITY OF AN OPERATING CYCLE TO APOULTRY BUSINESS (BROILERS)

Calculate the interest value , 1. Suppose a firm's tax rate is 35%. What af...

1. Suppose a firm's tax rate is 35%. What affect would a $10 million operating expense have on this year's earnings?  What effect would it have on next year's earnings? 2. What

State the term- adequate working capital, State the term- adequate working ...

State the term- adequate working capital If a firm doesn't have adequate working capital, that is, it doesn't invest sufficient funds in current assets, it can become illiquid

Duration and convexity of mortgage backed security, Duration an...

Duration and Convexity of MBS A graph decpicting the price of the security under study and the interest rates helps in assessing the duratio

Operating and financial leverage, explain the significance of operating lev...

explain the significance of operating leverage and financial with the help of example?

Rating scale, Rating denote an issuer's ability to respond to adverse...

Rating denote an issuer's ability to respond to adverse changes in circumstances and economic conditions. The rating scale is generally differentiated into variou

Objectives of financial services authority, Objectives of financial service...

Objectives of financial services authority FSMA provides four statutory objectives to FSA. They are: Market Confidence: Maintaining confidence in the financial system;

Determine about the zero interest bonds, Determine about the Zero Interest ...

Determine about the Zero Interest Bonds (ZIBs) Very much alike DDBs, only crucial difference is that these are issued at face values (DDBs are issued at a discount to face valu

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