Learning Outcome Statements

1. Overview of Embedded Options

a. describe fixed-income securities with embedded options;

2. Relationships between the Values of a Callable or Putable Bond, Straight Bond, and Embedded Option

b. explain the relationships between the values of a callable or putable bond, the underlying option-free (straight) bond, and the embedded option;

c. describe how the arbitrage-free framework can be used to value a bond with embedded options;

3. Valuation of Default-Free Callable and Putable Bonds

d. explain how interest rate volatility affects the value of a callable or putable bond;

e. explain how changes in the level and shape of the yield curve affect the value of a callable or putable bond;

f. calculate the value of a callable or putable bond from an interest rate tree;

4. Option-Adjusted Spread

g. explain the calculation and use of option-adjusted spreads;

h. explain how interest rate volatility affects option-adjusted spreads;

5. Duration

i. calculate and interpret effective duration of a callable or putable bond;

j. compare effective durations of callable, putable, and straight bonds;

k. describe the use of one-sided durations and key rate durations to evaluate the interest rate sensitivity of bonds with embedded options;

6. Effective Convexity

l. compare effective convexities of callable, putable, and straight bonds;

7. Valuation and Analysis of Capped and Floored Floating-Rate Bonds

m. calculate the value of a capped or floored floating-rate bond;

8. Valuation and Analysis of Convertible Bonds

m. describe defining features of a convertible bond;

n. calculate and interpret the components of a convertible bond's value;

o. describe how a convertible bond is valued in an arbitrage-free framework;

p. compare the risk-return characteristics of a convertible bond with the risk-return characteristics of a straight bond and of the underlying common stock.