Extendible bond
Extendible bond (or extendable bond[1]) is a complex bond with the embedded option for a holder to extend its maturity date by a number of years.[2][3] Such a bond may be considered as a portfolio of a straight, shorter-term bond and a call option to buy a longer-term bond. This relatively rare type of bond works to the advantage of investors during periods of declining interest rates.[4] Pricing of the extendible bond will be similar to that of a puttable bond.
Sometimes, the bond may be structured so as to give an option to extend to the issuer.[5] In this case, pricing will be similar to that of a callable bond.
Pricing
- See also Bond option: Embedded options, for further detail.
Price of extendible bond = Price of straight bond + Price of the option to extend
- Price of an extendible bond is always higher than the price of a straight bond because the embedded option adds value to an investor;[6]
- Yield on an extendible bond is lower than the yield on a straight bond.
References
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