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FINANCIAL MARKET COURSES

Callable Bonds

A callable bond is a bond with an embedded interest rate option, which represents the right of the issuer to call the bond and buy it back before maturity. In this course, we outline the fundamentals of callable bonds, examine some variations on the regular call structure and explain in detail how callable structures are priced. The concept of option-adjusted spread (OAS), which allows issuers to incorporate the optionality of a callable bond into the quoted spread, is described in detail within the pricing topic.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Describe the fundamental structure of callable bonds

    Price callable bonds from the perspective of both issuers and investors

    Identify variations on the regular callable bond structure

  • COURSE OUTLINE

    Topic 1: Overview of Callable Bonds

    What is Callable Bond?

    Value of the Call Option

    Callable Bond Yield Calculations

    Topic 2: Pricing of Callable Bonds

    Overview of Option Adjusted Spread (OAS)

    o OAS Models

    Modelling Future Interest Rate Levels

    o Black-Derman-Toy Model

    • Callable Bond Valuation

    • Full Call Option Value

    • Full Call Option Value – Alternative Approach

    Valuing as a Swaption

    o Issuers Position

    Topic 3: Other Callable Structures

    Step-up Callable Structures

    o Multi-step Callable Note – An Example

    • Receiver Swaption Package

    • Creating a Single Strike

    • Creating a Single Stroke – Swaption Value

    Callable Zero-Coupon Bonds

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    60 Minutes

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