Question

a) How can issuers of bonds protect themselves against
unpredicted drops in the interest rate?
b) How can buyers of bonds protect the future payments
they have been promised?
c) What is a callable bond? Who gains from a call
option? In what situation? What can we say about the
prices and yields of two identical

Answer 1

a) The issuers of bond can protect themselves against unpredicted drop in interest rates by diversification. The concept of diversification is the strategy of spreading the investment amount over a wide variety of investments like stocks, mutual funds etc.

b) The buyers of the bond protect the future payments by the bond document. It promises the bond buyer payment from the company for yhe bond period.

c) A callable bond is a bond that is called back by the issuer of the bond at the prive determined while issue.

A call option is the option that gives the right but not the obligation to buy the underlying assets. It is a gain to the optiom holders when the price of the underlying asset increases as the holder will then get the underlying asset at a lower price.