Fixed income securities

Question 1

when the market price drops what would you do with a real option?

Answer 1

you would exercise the option to not product, i.e. mining company

Question 2

what is the difference between real options and DCFs?

Answer 2

real options recognize that firms change their behaviour based on market conditions.
DCF expected the firm to take action if the NPV is positive, regardless of possible changes in the market condition

Question 3

valuing equity is similar to valuing…..?

Answer 3

a call option

Question 4

what is a sign of increased volatility? what does this result in?

Answer 4

larger spread between U and D, higher value of option/equity, lower value for bond

Question 5

why are callable bonds useful to the borrower?

Answer 5

if interest rates drop, they could borrow money to repay the bond issued earlier and borrow the new amount at a lower interest rate.

Question 6

how do putable bonds benefit the bond holder?

Answer 6

they can ask for their money back earlier than the maturity, which allows them to not be stuck at a fixeed interest rate until the bond has matured, and they can reinvest at a higher interest rate.