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In what ways is owning a corporate bond similar to writing a put option? A call...

In what ways is owning a corporate bond similar to writing a put option? A call option?

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Answer #1

Corporate bonds are similiar to that of writing a put option as the owners of corporate debt has effectively written a put option against the company. That means that they are bullish over the prospect of the company that they will receive their future payments against any kind of credit risk and default risk.

It can also be said that debtholders has effectively written a put option on the company assets at a premium over the risk free rate.

If the value of the company asset doesn't fall below the strike price, the option will expire worthless and they will retain the complete premium paid , But if the value of the asset fall below the strike price , then the owners of debt will exchange their holding for assets as company will have to face procedures of insolvency.

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