CHAPTER 11
The Analysis of Bonds with Embedded Options
The yield calculation for conventional bonds is relatively straightforward. This is because their redemption dates are fixed, so their total cash flows—the data required to calculate yield to maturity—is known with certainty. Less straightforward to analyze are bonds with embedded options—calls, puts, or sinking funds—so called because the option element cannot be separated from the bond itself. The difficulty in analyzing these bonds lies in the fact that some aspects of their cash flows, such as the timing or value of their future payments, are uncertain.
Because a callable bond has more than one possible redemption date, its future cash flows are not clearly defined. To calculate the ...
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