Investors in corporate bonds know that there is a risk of default. But they still I want to make sure that the company plays fair. They don’t want it to gamble with their money. Therefore, the loan agreement usually includes a number of debt covenants that prevent the company from purposely increasing the value of [...]
If we know how bond prices behave over time, we can modify the basic option valuation model of Chapter 22 to find the value of the callable bond, given that investors know that the company will call the issue as soon as the market price reach the call price. For example, look at Figure 25.2. [...]
The J.C. Penney bond includes a call option that allows the company to pay back the debt early. Sometimes you come across bonds that give the investor the repayment option. Retractable (or puttable) bonds give investors the right to demand early repayment; extendible bonds give them the option to extend the bond’s life.
For some [...]