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

Importance of the cost of capital, Q. Importance of the Cost of Capital? ...

Q. Importance of the Cost of Capital? Importance of the Cost of Capital:- (1) Useful in Designing the Capital Structure: - The perception of cost of capital plays a very imp

Requisites of a good average, An average should be: (a) vigorously defined,...

An average should be: (a) vigorously defined, (b) easy to compute, (c) capable of simple interpretation, (d) dependent on all the observed values, (e) not unduly influenced by one

Opperating cyles, discuss the applicability of operating cycles of vegetabl...

discuss the applicability of operating cycles of vegetable growing

#titleCOST VOUME PROFIT.., Ask question #Minimum ed# what is cost volume pr...

Ask question #Minimum ed# what is cost volume profits and what are the advantages and disadvantages?

Illustrate report on cash flow budget, Q. Illustrate report on cash flow bu...

Q. Illustrate report on cash flow budget? The cash flows The principal reason why certain statistics were not included in the cash flows is that they are incremental cash

Dow jones global index (djgi), Dow Jones Global Index (DJGI) The DJGI a...

Dow Jones Global Index (DJGI) The DJGI aims to cover 95% of market capitalisation at country level. As with FTSE and MSCI, there are the same 23 developed markets, but with gre

Sally Thomson, Ask questionSally Thomson #Minimum 100 words accepted#

Ask questionSally Thomson #Minimum 100 words accepted#

Debentures, A 16% debenture of R5 000 is redeemable at a premium of 10% aft...

A 16% debenture of R5 000 is redeemable at a premium of 10% after 5 years. The fair rate of return on similar debentures is 14% before tax. Calculate the present value of the capit

State about walk-through tests - auditor, Walk-through tests - Auditor ...

Walk-through tests - Auditor • "Walk-through tests" -That is tracing one or more transactions by accounting system and observing application of internal controls. Rev

Securities and exchange commission of usa, SECURITIES AND EXCHANGE COMMISSI...

SECURITIES AND EXCHANGE COMMISSION OF USA In the United States, securities industry is regulated by the United States Securities and Exchange Commission (SEC). It is the govern

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