Noncallable bond

CFA Level II
#1

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.

#2

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.

#3

it’s C because :

  1. 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 ).

  2. 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 :

  1. callable : issuer can call back the bonds and give you your money

  2. putable : you can pay back you bond

3 convertible : you can convert your bond into stock.

good luck on the june 2nd.

#4

Thanks but the convertible feature is not the option why have to add call option cost?

#5

bond = straight bond

convertible = get stock for you bond if you want.

call on stock = get stock if you want.

convertible = call on stock

so

convertible bond = straight bond + call on STOCK