What is an extendable Bond
Extendable bond-a bond that has the ability for the holder to force the Issuer to redeem the bonds before maturity at par. It combines bonds with a put option allowing the holder the right to cash in on major bond prematurely.
The investor may choose to shorten the maturity of the bonds due to unfavorable market conditions, or if they require the principal sooner than expected. Retractable bonds are also sometimes referred to as put bonds or putable Bond with a right to sell them back to the Issuer.
Breaking down the ‘retractable Bond
Function retractable bonds sets a basic constraint on the price of the bonds, regardless of interest rate increases prior to the expiration of their maturity. Initially, the rule was that retractable bonds is 0.2% less yield than conventional bonds of the same Issuer. Recently, with the growth opportunities and swap markets, these bonds are valued using options pricing methods.
To determine the price of the extendable bonds to the value of the underlying debt must first be defined using the discounted cash flow (DCF) approach. The function put is then measured as the benefit of holding or exercising the embedded option using the simulation options pricing. This pricing method is the basis of the cost of debt at different valuation parameter, the time until maturity of the bonds. Thus, the advantage of sliding bond is equal to its cash flows and the value of the function.
On the other hand, for investors who want the right to extend the maturity on more maturity extendable bonds function in much the same way as a retractable bond. Investors use both extendable and retractable bonds to modify the terms of their portfolios to take advantage of changes in interest rates. When interest rates rise, the act of folding and retractable bonds, as bonds with shorter terms; when interest rates fall, they act like bonds with a longer time.
An example of a retractable Bond
Suppose a company issues a 20-year retractable bonds to the market. This retractable position means that an investor who buys the bonds from the Issuer is entitled to receive the par value or the par value of the Bonds at any time prior to the expiration of their maturity. If the investor exercises the right to refuse, they will lose the remaining coupon payments on the bonds.
The investor can exercise the put option contraction due to adverse economic conditions such as higher interest rates. The increase in interest rates will reduce bond prices. As a result, investors can consider switching to high-yield bonds.