Question

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?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

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.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You buy a call option and buy a put option on bond X. The strike price...
You buy a call option and buy a put option on bond X. The strike price of the call option is $90 and the strike price of the put option is $105. The call option premium is $5 and the put option premium is $2. Both options can be exercised only on their expiration date, which happens to be the same for the call and the put. If the price of bond X is $100 on the expiration date, your...
For a European call option and a European put option on the same stock, with the...
For a European call option and a European put option on the same stock, with the same strike price and time to maturity, which of the following is true? A) Before expiration, only in-the-money options can have positive time premium. B) If you have a portfolio of protected put, you can replicate that portfolio by long a call and hold certain amount of risk-free bond. C) Since both the call and the put are risky assets, the risk-free interest rate...
For a European call option and a European put option on the same stock, with the...
For a European call option and a European put option on the same stock, with the same strike price and time to maturity, which of the following is true? A) When the call option is in-the-money and the put option is out-of-the-money, the stock price must be lower than the strike price. B) The buyer of the call option receives the same premium as the writer of the put option. C) Since both the call and the put are risky...
What are the differences between owning a corporate bond or a stock? What are the potential...
What are the differences between owning a corporate bond or a stock? What are the potential risks or rewards for each? Which do you think is better and why?
What are the prices of a call option and a put option with the following characteristics?...
What are the prices of a call option and a put option with the following characteristics? Stock price=$64 Exercise price =$60 Risk-free rate=2.7% per year compounded continuously. Maturity=4 months Stander deviation of =62% per year. Call price? put price?
What are the deltas of a call option and a put option with the following characteristics?...
What are the deltas of a call option and a put option with the following characteristics? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.) Stock price = $52 Exercise price = $50 Risk-free rate = 4.30% per year, compounded continuously Maturity = 9 months Standard deviation = 66% per year   Call option delta      Put option delta   
(TCO I)  In a bear market, which option positions make money? I. Buying a call II. Writing...
(TCO I)  In a bear market, which option positions make money? I. Buying a call II. Writing a call III . Buying a put IV. Writing a put I and II I and III I and IV II and III I and IV
A synthetic long call option can be created from put-call parity relation as follows: Buy the...
A synthetic long call option can be created from put-call parity relation as follows: Buy the call option, sell the stock, and sell a bond that pays the option’s exercise price at maturity Buy the call, sell the stock, and buy a bond that pays the exercise price at maturity Sell the call, buy the stock, and sell a bond that pays the exercise price at maturity Buy the stock, buy the put, and sell a bond that pays the...
What are the prices of a call option and a put option with the following characteristics?...
What are the prices of a call option and a put option with the following characteristics? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) Stock price = $76 Exercise price = $75 Risk-free rate = 4.50% per year, compounded continuously Maturity = 4 months Standard deviation = 63% per year   Call price $      Put price $   
Consider a European call option and a European put option on a non dividend-paying stock. The...
Consider a European call option and a European put option on a non dividend-paying stock. The price of the stock is $100 and the strike price of both the call and the put is $104, set to expire in 1 year. Given that the price of the European call option is $9.47 and the risk-free rate is 5%, what is the price of the European put option via put-call parity?  
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT