Extendible bond

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
Further information: Bond option § Embedded options

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
  1. extendable bond
  2. Financial Times Lexicon
  3. "Investment Alternatives". Archived from the original on 2011-07-06. Retrieved 2010-10-18.
  4. Extendable bond — Invest Definition
  5. Extendable Bond
  6. IMF Puttable and Extendible Bonds
This article is issued from Wikipedia. The text is licensed under Creative Commons - Attribution - Sharealike. Additional terms may apply for the media files.