Dennis is looking to buy a 10-year bond from Widgets, Inc., and some of the issues on the market have embedded put options. To accurately calculate the value for those options, what will Dennis not need to include in his model?
The future interest rates and future credit rating will
determine the value of the option. Higher future interest rates and lower
future credit ratings will make the option more valuable. Widgets, Inc. has no
say in whether the put option is exercised, and will therefore have no
worthwhile impact on Dennis’s decision.
I apologize for the lack of a QOTW on Monday. There will be one next week!