I’m reading the dervivatives portion of the Schweser book 5 again and a little confused because the callable bond value calculation is different in comparison to the fixed income section in the book 4.
In book 4, for a callable bond, the price at each node that is discounted is either less than 100 or 100 (if it can be called at 100). For book 5, they just seem to be discounting at many prices above 100.
Any chance someone can help me to explain why?
I’m referring to the example on pg. 71 of schweser book 5.
I’m referring to the example on pg. 71 of schweser book 5.
Well these two are diffrent calculations. In fixed income section, it’s for the bond itself. In derivative, it’s for the value of option per se. Schweser has discounted I guess to demonstrate the difference been American and European call options but they are not using those values. End of the day, your value is calculated using final nodes. However, in case of American, the pay off may be different as it may be called at any time.
but, you need to calculate the callable bond prices to calcualte the option value. So it’s the callable bond price I’m asking about
but, you need to calculate the callable bond prices to calcualte the option value. So it’s the callable bond price I’m asking about
Yeah so in case of fixed income chapter the question you were attempting must have given that bond can be called after a year or so. But here you are calculating for European option which can only be called at maturity.