Construct bond with embedded option
creates a new instrument set containing Bond with embedded option instruments.InstSet
= instoptembnd(CouponRate
,Settle
,Maturity
,OptSpec
,Strike
,ExerciseDates
)
adds Bond with embedded option instruments to an existing instrument set.InstSet
= instoptembnd(InstSet
,CouponRate
,Settle
,Maturity
,OptSpec
,Strike
,ExerciseDates
)
uses additional name-value pairs in addition to the required arguments in the previous
syntax.InstSet
= instoptembnd(___,Name,Value
)
[
lists field meta-data for the Bond option instrument.FieldList
,ClassList
,TypeString
] = instoptembnd
This example shows how to create a bond with an embedded option using the following data.
Settle = 'jan-1-2007'; Maturity = 'jan-1-2010'; CouponRate = 0.07; OptSpec = 'call'; Strike= 100; ExerciseDates= {'jan-1-2008' '01-Jan-2010'}; AmericanOpt=1; Period = 1; InstSet = instoptembnd(CouponRate, ... Settle, Maturity, OptSpec, Strike, ExerciseDates,'AmericanOpt', AmericanOpt, ... 'Period', Period); % display the instrument instdisp(InstSet)
Index Type CouponRate Settle Maturity OptSpec Strike ExerciseDates Period Basis EndMonthRule IssueDate FirstCouponDate LastCouponDate StartDate Face AmericanOpt 1 OptEmBond 0.07 01-Jan-2007 01-Jan-2010 call 100 01-Jan-2008 01-Jan-2010 1 0 1 NaN NaN NaN NaN 100 1
InstSet
— Instrument variableInstrument variable, specified only when adding Bond embedded option instruments to
an existing instrument set. For more information on the InstSet
variable, see instget
.
Data Types: struct
CouponRate
— Bond coupon rate Bond coupon rate, specified as a scalar or an
NINST
-by-1
decimal annual rate or
NINST
-by-1
cell array, where each element is a
NumDates
-by-2
cell array. The first column of
the NumDates
-by-2
cell array is dates and the
second column is associated rates. The date indicates the last day that the coupon rate
is valid.
Data Types: double
| cell
Settle
— Settlement dateSettlement date, specified as a scalar or an
NINST
-by-1
vector of serial date numbers or date
character vectors.
Data Types: double
| char
Maturity
— Maturity dateMaturity date, specified as a scalar or an
NINST
-by-1
vector of serial date numbers or date
character vectors.
Data Types: double
| char
OptSpec
— Definition of option 'call'
or
'put'
| cell array of character vectors with values 'call'
or
'put'
Definition of option, specified as a scalar or an
NINST
-by-1
cell array of character
vectors.
Data Types: char
Strike
— Option strike price valuesOption strike price value, specified as a scalar or an
NINST
-by-1
or an
NINST
-by-NSTRIKES
depending on the type of option:
European option — NINST
-by-1
vector of strike price values.
Bermuda option — NINST
by number of strikes
(NSTRIKES
) matrix of strike price values. Each row is the
schedule for one option. If an option has fewer than NSTRIKES
exercise opportunities, the end of the row is padded with
NaN
s.
American option — NINST
-by-1
vector of strike price values for each option.
Data Types: double
ExerciseDates
— Option exercise datesOption exercise dates, specified as scalar or an
NINST
-by-1
,
NINST
-by-2
, or
NINST
-by-NSTRIKES
using serial date numbers or
date character vectors, depending on the type of option:
For a European option, use a NINST
-by-1
vector of dates. For a European option, there is only one
ExerciseDates
on the option expiry date.
For a Bermuda option, use a
NINST
-by-NSTRIKES
vector of dates.
For an American option, use a NINST
-by-2
vector of exercise date boundaries. The option can be exercised on any date
between or including the pair of dates on that row.
Data Types: double
| char
Specify optional
comma-separated pairs of Name,Value
arguments. Name
is
the argument name and Value
is the corresponding value.
Name
must appear inside quotes. You can specify several name and value
pair arguments in any order as
Name1,Value1,...,NameN,ValueN
.
InstSet =
instoptembnd(InstSet,CouponRate,Settle,Maturity,OptSpec,Strike,ExerciseDates,'Period',1,'AmericanOp',1)
'AmericanOpt'
— Option type0
European/Bermuda (default) | integer with values 0
or 1
Option type, specified as the comma-separated pair consisting of
'AmericanOpt'
and a scalar or an
NINST
-by-1
positive integer flags with values:
0
— European/Bermuda
1
— American
Data Types: double
'Period'
— Coupons per year2
per year (default) | vectorCoupons per year, specified as the comma-separated pair consisting of
'Period'
and a scalar or an
NINST
-by-1
vector.
Data Types: double
'Basis'
— Day-count basis0
(actual/actual) (default) | integer from 0
to 13
Day-count basis, specified as the comma-separated pair consisting of
'Basis'
and a scalar or an
NINST
-by-1
vector of integers.
0 = actual/actual
1 = 30/360 (SIA)
2 = actual/360
3 = actual/365
4 = 30/360 (PSA)
5 = 30/360 (ISDA)
6 = 30/360 (European)
7 = actual/365 (Japanese)
8 = actual/actual (ICMA)
9 = actual/360 (ICMA)
10 = actual/365 (ICMA)
11 = 30/360E (ICMA)
12 = actual/365 (ISDA)
13 = BUS/252
For more information, see Basis.
Data Types: double
'EndMonthRule'
— End-of-month rule flag1
(in effect) (default) | nonnegative integer with values 0
or
1
End-of-month rule flag, specified as the comma-separated pair consisting of
'EndMonthRule'
and a scalar nonnegative integer or an
NINST
-by-1
vector. This rule applies only when
Maturity
is an end-of-month date for a month having 30 or fewer days.
0
= Ignore rule, meaning that a bond coupon payment date
is always the same numerical day of the month.
1
= Set rule on, meaning that a bond coupon payment date
is always the last actual day of the month.
Data Types: double
'IssueDate'
— Bond issue dateBond issue date, specified as the comma-separated pair consisting of
'IssueDate'
and a scalar or an
NINST
-by-1
vector using serial date numbers or
date character vectors.
Data Types: double
| char
'FirstCouponDate'
— Irregular first coupon dateIrregular first coupon date, specified as the comma-separated pair consisting of
'FirstCouponDate'
and a scalar or an
NINST
-by-1
vector using serial date numbers
date or date character vectors.
When FirstCouponDate
and LastCouponDate
are both specified, FirstCouponDate
takes precedence in determining
the coupon payment structure. If you do not specify a
FirstCouponDate
, the cash flow payment dates are determined from
other inputs.
Data Types: double
| char
'LastCouponDate'
— Irregular last coupon dateIrregular last coupon date, specified as the comma-separated pair consisting of
'LastCouponDate'
and a scalar or an
NINST
-by-1
vector using serial date numbers or
date character vectors.
In the absence of a specified FirstCouponDate
, a specified
LastCouponDate
determines the coupon structure of the bond. The
coupon structure of a bond is truncated at the LastCouponDate
,
regardless of where it falls, and is followed only by the bond's maturity cash flow
date. If you do not specify a LastCouponDate
, the cash flow payment
dates are determined from other inputs.
Data Types: char
| double
'StartDate'
— Forward starting date of paymentsForward starting date of payments (the date from which a bond cash flow is
considered), specified as the comma-separated pair consisting of
'StartDate'
and a scalar or an
NINST
-by-1
vector using serial date numbers or
date character vectors. The StartDate
is the date when a bond
actually starts (that is, the date from which a bond's cash flows can be considered).
To make an option embedded bond instrument forward starting, specify this date as a
future date.
If you do not specify StartDate
, the effective start date is
the Settle
date.
Data Types: char
| double
'Face'
— Face value100
(default) | NINST
-by-1
vector | NINST
-by-1
cell arrayFace or par value, specified as the comma-separated pair consisting of
'Face'
and a scalar or an
NINST
-by-1
vector or an
NINST
-by-1
cell array where each element is a
NumDates
-by-2
cell array where the first
column is dates and the second column is associated face value. The date indicates the
last day that the face value is valid.
Note
Instruments without a Face
schedule are treated as either
vanilla bonds or stepped coupon bonds with embedded options.
Data Types: double
InstSet
— Variable containing a collection of instrumentsVariable containing a collection of instruments, returned as a structure.
Instruments are broken down by type and each type can have different data fields. Each
stored data field has a row vector or string for each instrument. For more information
on the InstSet
variable, see instget
.
FieldList
— Name of each data field for Bond embedded option instrument Name of each data field for a Bond embedded option instrument, returned as an
NFIELDS
-by-1
cell array of character
vectors.
ClassList
— Data class for each fieldData class for each field, returned as an
NFIELDS
-by-1
cell array of character vectors.
The class determines how arguments are parsed. Valid character vectors are
'dble'
, 'date'
, and 'char'
.
TypeString
— Type of instrumentType of instrument, returned as a character vector. For a Bond embedded option
instrument, TypeString = 'OptEmBond'
.
A vanilla coupon bond is a security representing an obligation to repay a borrowed amount at a designated time and to make periodic interest payments until that time.
The issuer of a bond makes the periodic interest payments until the bond matures. At maturity, the issuer pays to the holder of the bond the principal amount owed (face value) and the last interest payment. A vanilla bond with an embedded option is where an option contract has an underlying asset of a vanilla bond.
A step-up and step-down bond is a debt security with a predetermined coupon structure over time.
With these instruments, coupons increase (step up) or decrease (step down) at specific times during the life of the bond. Stepped coupon bonds can have options features (call and puts).
A sinking fund bond is a coupon bond with a sinking fund provision.
This provision obligates the issuer to amortize portions of the principal prior to maturity, affecting bond prices since the time of the principal repayment changes. This means that investors receive the coupon and a portion of the principal paid back over time. These types of bonds reduce credit risk, since it lowers the probability of investors not receiving their principal payment at maturity.
The bond may have a sinking fund call option provision allowing the issuer to retire the sinking fund obligation either by purchasing the bonds to be redeemed from the market or by calling the bond via a sinking fund call, whichever is cheaper. If interest rates are high, then the issuer buys back the requirement amount of bonds from the market since bonds are cheap, but if interest rates are low (bond prices are high), then most likely the issuer is buying the bonds at the call price. Unlike a call feature, however, if a bond has a sinking fund call option provision, it is an obligation, not an option, for the issuer to buy back the increments of the issue as stated. Because of this, a sinking fund bond trades at a lower price than a non-sinking fund bond.
Amortizing callable or puttable bonds work under a scheduled
Face
.
An amortizing callable bond gives the issuer the right to call back the bond, but
instead of paying the Face
amount at maturity, it repays part of the
principal along with the coupon payments. An amortizing puttable bond, repays part of the
principal along with the coupon payments and gives the bondholder the right to sell the bond
back to the issuer.
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