Fixed Income and Interest Rate Derivative Analysis

Chapter 9

Callable and convertible bonds

Many corporate bonds, are subject to being

called.

The call feature gives the

issuer of the bond the right to buy back the bond at a particular price. A

schedule of prices and dates exist at which the bond can be called.

This right is an

option,

not an obligation so option valuation techniques

need to be used in valuing callable bonds. Because the option cannot be

separated from the corporate bond it is called an

embedded

option.

Since calling is a right of the issuer, the callable feature is a disadvan-

tage to the investor and reduces ...