Hello,
Can anyone help me understand why the price of the callable bond is capped by the price of the call option if it is near the exercise date. Thank you!
It’s not capped by the price of the call option; it’s capped by the call price (i.e., the price at which it can be called).
Would you pay $1,040 for a bond that could be called away from you at any moment for $1,020?
ok, so duuump!! i misunderstood the sentence, i thought it was the call premium. thank you