if they are option-free, why have to add call option? please add sone comments
Which of the following is equal to the value of a noncallable / nonputable convertible bond? The value of the corresponding:
A) callable bond plus the value of the call option on the stock. B) straight bond. C) straight bond plus the value of the call option on the stock.
Your answer: B was incorrect. The correct answer was C) straight bond plus the value of the call option on the stock.
The value of a noncallable/nonputable convertible bond can be expressed as:
Option-free convertible bond value = straight value + value of the call option on the stock.
I think they mean that the callable/putable part is different from the convertible bond. So, it’s a convertible bond that is not callable or putable, not a convertible bond with no embedded option.
it’s C because :
convertible bond is a straight bond that the you can convert into stock when ever you want ( you will do it if convert factor * stock price > straight bond value ).
callable and putable bond means you can have your Money back / or the issuer can pay you back.
so this means that a convertible bonds gives you a call option on stocks since you can CONVERT your bonds into stocks.
3 type of options :
callable : issuer can call back the bonds and give you your money
putable : you can pay back you bond
3 convertible : you can convert your bond into stock.
good luck on the june 2nd.
Thanks but the convertible feature is not the option why have to add call option cost?
bond = straight bond
convertible = get stock for you bond if you want.
call on stock = get stock if you want.
convertible = call on stock
convertible bond = straight bond + call on STOCK