CFA Level 1 - Fixed Income Investments
Options that Benefit the Holder
- Puts - This option is the exact opposite of a call. It allows the bondholder to sell the bond or "put" the bond back to the issuer at a certain price and date(s) before its maturity. As rates rise, this helps the bondholders dump their holdings and reinvest their proceeds at a higher rate.
- Floor - As mentioned earlier, a floor enables a firm to set a limit on how low the payment of their coupon can be. This benefits the holder because as rates decrease, it holds their interest payment at a certain level even as market rates decline below the floor level.
- Conversion Privilege - This allows the bondholders to exchange their current bond with equity in the same firm using convertible bonds. They may also receive equity or fixed income securities in another firm by the use of exchangeable bonds. This benefits the holder because if the equity or other securities of the firm is outperforming the bonds, the bonds can be converted, allowing the holder to realize a higher return.