Hi,
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)?
Regards,
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”