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

#tFuture Value, You deposit $3,000 in a back account that pays 10% annually...

You deposit $3,000 in a back account that pays 10% annually, how much would you have im your account after 5 years?

Types of firms in securities firms and investment banking, What are the typ...

What are the types of firms that securities firms and investment banking industry included? Into the USA, the securities firms and investment banking industry comprises several

Explain gresham’s law, Explain Gresham’s Law. Answer:  Gresham’s law cons...

Explain Gresham’s Law. Answer:  Gresham’s law considers to the phenomenon that bad (abundant) money drives good (scarce) money out of circulation. This type of phenomenon was fre

Call and notice money, These funds represent borrowings made for a pe...

These funds represent borrowings made for a period of one day to upto a fortnight. However, the mechanism adopted to lend funds to the call and the notice money m

How to select the pattern of the investment, Q. How to Select the pattern o...

Q. How to Select the pattern of the investment? When the funds have been procured than a decision about the investment pattern is to be taken. The selection of the investment p

Ratchet bonds, The coupon rate of these types of bonds is adjusted pe...

The coupon rate of these types of bonds is adjusted periodically at a fixed margin over a reference rate. It can be adjusted southward only and once it is adjuste

Create a report that fully explains both directors views, The Directors of ...

The Directors of Rohan Plc are discussing the importance of the dividend policy on the market value of their firm. The Chairman considers that the dividend is important and does a

Global equity indexes, Global Equity Indexes: As described earlier in t...

Global Equity Indexes: As described earlier in this chapter, there are several stock market indexes available which depict the performance of particular sectors and a country a

Participants in hedge funds, Participants in Hedge Funds: The Sponsor ...

Participants in Hedge Funds: The Sponsor and the Investors Sponsors are promoters and generally, they hold a profit share on percentage for the capital invested in the Fun

Future value, (a).At the end of three years, how much is an initial deposit...

(a).At the end of three years, how much is an initial deposit of $100 worth, assuming a compound annual interest rate of (i) 100 percent? (ii) 10 percent? (iii) 0 percent? (b).b. A

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