Český finanční a účetní časopis 2012(3):52-60 | DOI: 10.18267/j.cfuc.321

Callable and Puttable Bond Valuation and Embedded Call and Put Option on Bond Cash Flow

Jaroslav Brada
Doc. Ing. Jaroslav Brada, Ph.D. - docent; Katedra měnové teorie a politiky, Fakulta financí a účetnictví, Vysoká škola ekonomická v Praze, nám. W. Churchilla 4, 130 67 Praha; <brada@vse.cz>.

The article describes the valuation of callable and puttable bonds without the need for treatment based on modeling of interest rates movement and without using of binomial or Black-Scholes option pricing model, using only the functions min and max. This paper also demonstrates how to calculate potential price - value of bonds, which contain the chained call (put) option - i.e. the valuation of bonds, when bond issuer (owner) may at its option choose a lump sum payment of the bond face value at a predetermined time point in the future. Attention is also paid to generalization of callable and puttable options to other types of option rights to payment flows associated with the existence of bonds incl. structured products. It is all about valuation of alternative payment flows that occur based on the simultaneous selection streams of payments by the owner of the bond and by the issuer of the bond.

Keywords: Callable and puttable bond; Bond valuation; Bonds with embedded options.
JEL classification: G12

Published: October 1, 2012  Show citation

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Brada, J. (2012). Callable and Puttable Bond Valuation and Embedded Call and Put Option on Bond Cash Flow. Czech Financial and Accounting Journal, 2012(3), 52-60. doi: 10.18267/j.cfuc.321
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