Extendible bond
Encyclopedia
Extendible bond is a complex bond with the embedded option
for a holder to extend its maturity date by a number of years. 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. 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. In this case, pricing will be similar to that of a callable bond
.
Embedded option
An Embedded option is a component of a financial bond or other security, and usually provides the bondholder or the issuer the right to take some action against the other party. There are several types of options that can be embedded into a bond. Some common types of bonds with embedded options...
for a holder to extend its maturity date by a number of years. Such a bond may be considered as a portfolio of a straight, shorter-term bond and a call option
Call option
A call option, often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option. The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument from the seller...
to buy a longer-term bond. This relatively rare type of bond works to the advantage of investors during periods of declining interest rates. Pricing of the extendible bond will be similar to that of a puttable bond
Puttable bond
Puttable bond is a bond with an embedded put option. The holder of the puttable bond has the right, but not the obligation, to demand early repayment of the principal...
.
Sometimes, the bond may be structured so as to give an option to extend to the issuer. In this case, pricing will be similar to that of a callable bond
Callable bond
A callable bond is a type of bond that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches the date of maturity. In other words, on the call date, the issuer has the right, but not the obligation, to buy back the bonds from the bond...
.
Pricing
Price of extendible bond = Price of straight bond + Price of the option to extend- Price of a extendible bond is always higher than the price of a straight bond because the embedded option adds value to an investor;
- Yield on an extendible bond is lower than the yield on a straight bond.