Finance:Extendible bond

From HandWiki

Extendible bond (or extendable bond[1]) is a complex bond with the embedded option for a holder to extend its maturity date by a number of years.[2][3] Such a bond may be considered as a portfolio of a straight, shorter-term bond and a call option to buy a longer-term bond. This relatively rare type of bond works to the advantage of investors during periods of declining interest rates.[4] Pricing of the extendible bond will be similar to that of a puttable bond. Sometimes, the bond may be structured so as to give an option to extend to the issuer.[5] In this case, pricing will be similar to that of a callable bond.

Pricing

Further information: Bond option § Embedded options

Price of extendible bond = Price of straight bond + Price of the option to extend

  • Price of an extendible bond is always higher than the price of a straight bond because the embedded option adds value to an investor;[6]
  • Yield on an extendible bond is lower than the yield on a straight bond.

References

  1. ↑ extendable bond
  2. ↑ "Financial Times". https://www.ft.com/. 
  3. ↑ "Investment Alternatives". http://classes.uleth.ca/200803/mgt3412a/ch02.ppt. 
  4. ↑ "Extendable bond — Invest Definition". http://invest.yourdictionary.com/extendable-bond. 
  5. ↑ "Extendable Bond Definition". https://www.investopedia.com/terms/e/extendablebond.asp. 
  6. ↑ "IMF Puttable and Extendible Bonds". http://www.imf.org/external/pubs/ft/wp/2003/wp03201.pdf. 

External links



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