Reading 25
Valuation and Analysis of Bonds With Embedded Options
8 modules 30 min
0/8
Exam Focus
This topic review extends the arbitrage free valuation framework to valuation of bonds with embedded options. Understand the risk/return dynamics of embedded options, including their impact on a bond’s duration and convexity. You should also know the adjustment required for the valuation of credit risky bonds, including the process to estimate an OAS.
Finally, understand the terminology and risk/return characteristics of convertibles.
Recovered source visuals
Modules
- Module 25.1Types Of Embedded OptionsDescribe fixed income securities with embedded options. · Explain the relationships between the values of a callable or putable bond, the underlying option free (straight) bond, and the embedded option.2 min · 2 LOS
- Module 25.2Valuing Bonds With Embedded Options, Part 1Describe how the arbitrage free framework can be used to value a bond with embedded options. · Calculate the value of a callable or putable bond from an interest rate tree.3 min · 2 LOS
- Module 25.3Valuing Bonds With Embedded Options, Part 2Explain how interest rate volatility affects the value of a callable or putable bond. · Explain how changes in the level and shape of the yield curve affect the value of a callable or putable bond.2 min · 2 LOS
- Module 25.4Option Adjusted SpreadExplain the calculation and use of option adjusted spreads. · Explain how interest rate volatility affects option adjusted spreads.4 min · 2 LOS
- Module 25.5DurationCalculate and interpret effective duration of a callable or putable bond. · Compare effective durations of callable, putable, and straight bonds.2 min · 2 LOS
- Module 25.6Key Rate DurationDescribe the use of one sided durations and key rate durations to evaluate the interest rate sensitivity of bonds with embedded options. · Compare effective convexities of callable, putable, and straight bonds.5 min · 2 LOS
- Module 25.7Capped And Floored FloatersCalculate the value of a capped or floored floating rate bond.3 min · 1 LOS
- Module 25.8Convertible BondsDescribe defining features of a convertible bond. · Calculate and interpret the components of a convertible bond’s value. · Describe how a convertible bond is valued in an arbitrage free framework. · Compare the risk−return characteristics of a convertible bond with the risk−return characteristics of a straight bond and of the underlying common9 min · 4 LOS