The call price is the price at which the issuer of a bond may redeem the bond before its maturity date. The issuer typically calls the bond when interest rates have fallen, allowing it to refinance the bond at a lower interest rate. For the investor, a callable bond typically pays a higher coupon rate than a non-callable bond with the same maturity date. This higher coupon rate compensates the investor for the risk that the bond may be called away before maturity.
How does a call option affect bond price?
A call option on a bond gives the holder the right to buy the bond at a specified price (the strike price) on or before a specified date (the expiration date). The effect of a call option on the price of the underlying bond depends on the strike price of the option and the current market price of the bond.
If the current market price of the bond is below the strike price of the option, then the option is said to be "out of the money" and will have no effect on the price of the bond.
If the current market price of the bond is equal to the strike price of the option, then the option is said to be "at the money" and will have a small positive effect on the price of the bond.
If the current market price of the bond is above the strike price of the option, then the option is said to be "in the money" and will have a significant positive effect on the price of the bond.
What are the 4 types of options?
There are four types of options: puts, calls, covered calls, and naked calls. Puts give the holder the right to sell an asset at a certain price, while calls give the holder the right to buy an asset at a certain price. Covered calls are when the holder of a call also owns the underlying asset, while naked calls are when the holder of a call does not own the underlying asset.
How is call premium calculated?
The call premium is the amount by which the price of a call option exceeds the intrinsic value. The intrinsic value is the difference between the strike price and the underlying asset's spot price.
The premium also factors in the time value of money, which is the amount of time until the option expires. The longer the time until expiration, the higher the premium will be. This is because there is a greater chance that the underlying asset's price will move enough to make the option in-the-money before expiration.
Other factors that affect the call premium are the underlying asset's volatility and the interest rate. Higher volatility and interest rates will result in a higher premium.
Is call price dependent on maturity date?
Yes, the call price is dependent on the maturity date. This is because the call price is the price at which the issuer of the bond has the right to redeem the bond before the maturity date. If the maturity date is far in the future, the call price will be higher than if the maturity date is relatively close. Why is a call option called a call? A call option is called a call because it gives the holder the right, but not the obligation, to "call" the underlying security at a specified price within a certain timeframe. The term "call" in this context means to buy the security.