Chapter 11

Bonds with Embedded Options


This chapter is an analytical review of callable and putable bonds, which like convertible securities have an embedded option. Bonds with embedded options are debt instruments that give the right to redeem the bond before maturity. As we know, the yield to maturity represents the key measure of bond’s return. The calculation of the return is particularly easy for conventional bonds because the redemption date is known with certainty, as their value. In contrast, for callable bonds, but also for other bonds as putable and sinking fund bonds, the redemption date is not known with certainty because the bonds can be redeemed before maturity. In this chapter, we illustrate the pricing of bonds with ...

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