A call option gives value to the issuer and put option gives value to bondholder. From perspective of issuer, the call has option cost > 0, does this just mean the issuer has to pay for the option? And from perspective of the issuer, the put option cost is < 0 , what does this mean?
It means the rate i borrow at will be adjusted to relfect the value of the option i’ve bought or sold, relative to an option free bond.
e.g., the coupon rate on an option free bond is 5%, on a callable bond it’s 6% and putable bond its 4%.
The party that owns the option always – _ always! _ – has to pay for it.
For a call option, the issuer pays for it either with a higher coupon rate or with a lower price. For a call option the bondholder pays for it either with a lower coupon rate or with a higher price.
In the last part of your sentence, do you mean " for a put option the bondholder pays for it either with a lower coupon rate or with a higher price"
From perspective of issuer, the call has option cost > 0 ( convenience to issuer)
read it as - if issues wants the flexibility of calling it before maturity ay his convenience he will have to pay for it as magicina said either high coupon or discount. COST to borrower.
issuer, the put option cost is < 0 ( convenience to holder)
so cost to issuer is negative meaning - he can say i would pay only 5% coupon when RF rate is 6%. and you would agree as the risk of loosing money is mitigated by PUT option
Yes: good catch.
I fixed it.