Extendible bond (or extendable bond) is a complex bond with the
embedded option
An embedded option is a component of a financial bond or other security, which provides the bondholder or the issuer the right to take some action against the other party. There are several types of options that can be embedded into a bond; common ...
for a holder to extend its maturity date by a number of years. Such a bond may be considered as a portfolio of a straight, shorter-term bond and a
call option to buy a longer-term bond. This relatively rare type of bond works to the advantage of investors during periods of declining interest rates. Pricing of the extendible bond will be similar to that of a
puttable bond Puttable bond (put bond, putable or retractable bond) is a bond with an embedded put option. The holder of the puttable bond has the right, but not the obligation, to demand early repayment of the principal. The put option is exercisable on one o ...
.
Sometimes, the bond may be structured so as to give an option to extend to the issuer. In this case, pricing will be similar to that of a
callable bond
A callable bond (also called redeemable bond) is a type of bond (debt security) that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches its date of maturity. In other words, on the call ...
.
Pricing
Price of extendible bond = Price of straight bond + Price of the option to extend
* Price of an extendible bond is always higher than the price of a straight bond because the embedded option adds value to an investor;
* Yield on an extendible bond is lower than the yield on a straight bond.
References
External links
10 Investment AlternativesFundamentals of Asset-Backed Extendible NotesEXTENDABLE MUNICIPAL COMMERCIAL PAPER NOTE RESOLUTION
{{DEFAULTSORT:Extendible Bond
Fixed income analysis
Debt
Commercial bonds
Embedded options