Chapter 6

Question 1

Puttable vs callable bond (options)
Purpose?
Give the conditions of interest rates where each would be exercised.

Answer 1

Puttable, avoid downside potential; so if lender thinks the bond value may fall soon, they can sell at the agreed price on one of the agreed dates

Callable , the indebted party can get the bond back. This means there is flexibility in financing.

Puttable is when the lender wants it back, so they may expect interest rates to RISE soon
Callable- indebted want their loan back, often so the can refinance - this would mean they expect Interest rates to FALL