Bonds with embedded call options issued at a premium?


The curriculum says that bonds with embedded call options are generally issued at a large premium, and at issuance, the calls are generally in the money.

Why would this be? It defies logic.

Why would investors pay a premium for something that goes against them (embedded call options)?


You maybe read it the other way around

For a call option, investor is getting a compensation for holding a bond that the issuer could call anytime interest rates falls, and the compensation is the “premium”

Think about it this way, an investor would pay

bond price - Calls premium = callable “as issuer would pay the call premium to the investor”

bond price + Puts premium = putable “as the investor wants to get the put option he/she would pay more which is the pits premium”