Learn how and when to remove this template message An embedded option is a component of a financial bond or other security, and usually provides the bondholder or the issuer the right to take some action against issuer option what is it other party. There are several types of options that can be embedded into a bond.
Some common types of bonds with embedded options include callable bondputtable bondconvertible bondextendible bondexchangeable bondand capped floating rate note. A bond may have several options embedded if they are not mutually exclusive.
Securities other than bonds that may have embedded options include senior equity, convertible preferred stock and exchangeable preferred stock.
See Convertible security. The valuation of these securities combines bond- or equity-valuationas appropriate, with option pricing.
For bonds here, there are two main approaches, as follows. Once the price has been calculated, the various yields can then be calculated for the security.
Depending on the type of option, the option priceas calculated using Black Scholesis either added to or subtracted from the price of the "straight" bond i.
A bespoke " tree " usually a lattice based - short rate model may be constructed where the option's effect is incorporated at each node in the tree, impacting either the bond price or the option price as specified; see further under bond option.