固定收益证券chapter09 Options on Bonds and Bonds with Embedded Options.ppt

FIXED-INCOME SECURITIES Lecture 9 Options on Bonds and Bonds with Embedded Options Callable Bonds and Putable BondsBond with Embedded Options Callable bonds – Issuer may repurchase at a pre-specified call price – Typically called if interest rates fall A callable bond has two disadvantages for an investor – If it is effectively called, the investor will have to invest in another bond yielding a lower rate – A callable bond has the unpleasant property for an investor to appreciate less than a normal similar bond when interest rates fall – Therefore, an investor will be willing to buy such a bond at a lower price than a comparable option-free bond Examples – The UK Treasury bond with coupon 5.5% and maturity date 09/10/2012 can be called in full or part from 09/10/2008 on at a price of pounds 100 – The US Treasury bond with coupon 7.625% and maturity date 02/15/2007 can be called on coupon dates only, at a price of $100, from 02/15/2002 on – Such a bond is said to be discretely callable Callable and Putable Bonds Institutional Aspects Putable bond holder may retire at a pre-specified price A putable bond allows its holder to sell the bond at par value prior to maturity in case interest rates exceed the coupon rate of the issue So, he will have the opportunity to buy a new bond at a higher coupon rate The issuer of this bond will have to issue another bond at a higher coupon rate if the put option is exercised Hence a putable bond trades at a higher price than a comparable option-free bond Callable and Putable Bonds Yield-to-Worst Let us consider a bond with an embedded call option trading over its par value This bond can be redeemed by its issuer prior to maturity, from its first call date on – One can compute a yield-to-call on all possible call dates – The yield-to-worst is the lowest of the yield-to-maturity and all yields-to-call Example