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!

Question Of The Week - Fixed Income (5) - CFA Level 1

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This topic has 5 replies, 3 voices, and was last updated Apr-183:47 pm by hairyfairy.

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- AdaptPrep
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  31 Mar 2018 at 7:50 pm
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  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?
- hairyfairy
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  03 Apr 2018 at 9:09 am
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  I’m surprised by the even distribution of the answers of this question!
- googs1484
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  - CFA Level 3
  03 Apr 2018 at 10:50 pm
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  What’s the answer?
- googs1484
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  - CFA Level 3
  03 Apr 2018 at 11:59 pm
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  Ok good I was nervous I was wrong for a minute lol
- AdaptPrep
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  05 Apr 2018 at 7:54 pm
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  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!
- hairyfairy
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  - Undecided
  07 Apr 2018 at 3:47 pm
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  Keep em coming @PassedTense! 🙂
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