Bond valuation questions par, valuation, developed, following, regarding

ramzes

1)

Let's say you have an option to put a bond if it drops below $90 (par is $100). If there is decreased volatility, the chances of you being able to "put" the bond back to the issuer has diminished. Thus, the embedded option is worth less.

Conversely, if volatility increases, the chances of you needing to put the bond back to the issuer increases. Thus, having the ability to put the bond is more valuable.

Just remember: Higher volatility = higher value of embedded option.

scruge

Hi Guys,

Happy Diwali to you all!

I have following two queries regarding valuation of Bond

1) Why decrease in volatility of Interest Rate (yield) decreases the value of embedded options in a Bond?

2) For Boorstraping, you need a par yield curve, but do you always get a par yield curve even in developed economies? Can you not do bootstraping with the treasury instruments (of 6 monthly intervals) at whatever prices they are quoted at?

Many thanks in advance.