2. Retractable bonds allow the investor to redeem the bond at par or allow the bond to remain outstanding until maturity. a. These bonds are called puttable.

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Presentation transcript:

2. Retractable bonds allow the investor to redeem the bond at par or allow the bond to remain outstanding until maturity. a. These bonds are called puttable bonds, why? b. What is the underlying asset? What is the exercise price? c. When will the option be exercised? d. How about extendables (which give the bond issuer right to extend the bond)? Put option. If r rises, bond price down. Investors can “put” the bonds to the firm. Underlying asset: B. Strike: par value. If r up and bond price < par. Firm holds a put option which allows it to sell the bond to investors.