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Chapter 8: CP1-08 Bond and money markets

Discussion in 'CP1' started by yuli2513, Dec 5, 2021.

  1. yuli2513

    yuli2513 Very Active Member

    Hi,

    The question is on page 23 and the answer is given on page 25.

    I do not understand the 6th bullet point given in the answer: issuer exercises an option against the investor

    I find the call option (whether it exists) irrelevant of the question asked. Because the question only asks to discuss the potential reasons of not being able to get 5.5% pa return from the bond, so other instrument (e.g. a call option) should not be relevant.

    I am wondering if this is the right way to think for this type of questions, or do I miss something here?

    Thanks a lot!
     
    yuli2513, Dec 5, 2021
    #1
  2. Richie Holway

    Richie Holway ActEd Tutor Staff Member

    Hi Yuli,

    I assume you're referring to Question 8.2. As the question doesn't mention the specifics of the bond, it is possible that the bond is one with option features, and this is what the final point in the solution covers. For example, it might be that the issuer of the bond has the option to repay it at any time, and exercising the option can be described as the issuer exercising a call option against the investor, as per the point in the solution.

    So, in this context, the 'call option' is referring to a callable bond, rather than a different instrument to the bond. Callable bonds (and bonds with other option features) are covered in Chapter 12, Section 4.

    Kind regards,
    Richie
     
    Richie Holway, Dec 8, 2021
    #2
    yuli2513 likes this.
  3. yuli2513

    yuli2513 Very Active Member

    Thank you very much Richie, and my apologies for forgetting to include the question number, hope that didn't cause you trouble locating the question.
     
    yuli2513, Dec 8, 2021
    #3

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