Page 37 - FINAL CFA SLIDES DECEMBER 2018 DAY 14
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Session Unit 14:
50. Fixed income securities: Defining elements
LOS 50.f: Describe contingency provisions affecting the timing and/or nature of cash flows of fixed-
income securities and identify whether such provisions benefit the borrower or the lender., p.16
A contingency provision in bond indentures are referred to as embedded options: these are
exercisable at the option of the issuer of the bond and, therefore, are valuable to the issuer; others
are exercisable at the option of the purchaser of the bond and, thus, have value to the bondholder.
tanties
• Call options allow the issuer to redeem bonds at a specified call price.
• Put options allow the bondholder to sell bonds back to the issuer at a specified put price.
• Conversion options allow the bondholder to exchange bonds for a specified number of shares
of the issuer’s common stock.
• Call options benefit the issuer, while put options and conversion options benefit the bondholder.
