- CFA Exams
- 2021 Level II
- Study Session 13. Fixed Income (2)
- Reading 34. Valuation and Analysis of Bonds with Embedded Options
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Learning Outcome Statements PDF Download
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. |
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