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
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
- ^ extendable bond
- ^ "Financial Times". www.ft.com.
- ^ "Investment Alternatives". Archived from the original on 2011-07-06. Retrieved 2010-10-18.
- ^ "Extendable bond — Invest Definition". Archived from the original on 2011-07-18. Retrieved 2010-10-18.
- ^ "Extendable Bond Definition". Investopedia.
- ^ "IMF Puttable and Extendible Bonds" (PDF).
External links
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
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
- ^ extendable bond
- ^ "Financial Times". www.ft.com.
- ^ "Investment Alternatives". Archived from the original on 2011-07-06. Retrieved 2010-10-18.
- ^ "Extendable bond — Invest Definition". Archived from the original on 2011-07-18. Retrieved 2010-10-18.
- ^ "Extendable Bond Definition". Investopedia.
- ^ "IMF Puttable and Extendible Bonds" (PDF).