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Extendible bond

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Title: Extendible bond  
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Extendible bond

Extendible bond (or extendable bond[1]) is a complex bond with the embedded option for a holder to extend its maturity date by a number of years.[2][3] Such a bond may be considered as a portfolio of a straight, shorter-term bond and a call option to buy a longer-term bond. This relatively rare type of bond works to the advantage of investors during periods of declining interest rates.[4] Pricing of the extendible bond will be similar to that of a puttable bond.

Sometimes, the bond may be structured so as to give an option to extend to the issuer.[5] In this case, pricing will be similar to that of a callable bond.

Pricing

See also Bond option: Embedded options, for further detail.

Price of extendible bond = Price of straight bond + Price of the option to extend

  • Price of an extendible bond is always higher than the price of a straight bond because the embedded option adds value to an investor;[6]
  • Yield on an extendible bond is lower than the yield on a straight bond.

References

  1. ^ extendable bond
  2. ^ Financial Times Lexicon
  3. ^ Investment Alternatives
  4. ^ Extendable bond — Invest Definition
  5. ^ Extendable Bond
  6. ^ IMF Puttable and Extendible Bonds

External links

  • 10 Investment Alternatives
  • Fundamentals of Asset-Backed Extendible Notes
  • EXTENDABLE MUNICIPAL COMMERCIAL PAPER NOTE RESOLUTION
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