#45 Flashcards
1
Q
valuing embedded options
A
LOS 45.b
enbedded calls:
Vcall = Vstraight - Vcallable
“investors get a discount”
embedded puts:
Vput = Vputable - Vstraight
“investors pay a premium”
2
Q
volatility’s effect on bonds and embedded options
A
LOS 45.d
Straight bonds: value not affected by volatility
when volatility rises:
- Value of enbedded options go up
- Vcallable– = Vstraight - Vcall++
- Vputable++ = Vput++ - Vstraight
3
Q
level and shape of YC
A
LOS 45.e
- upside of Callable bond limited when rates decline
- downside of Putable bond limited when rates increase
- upward-sloping YC: call option = low value but put option = high value
- YC flattens: call option = high value but put option = low value
4
Q
A
