- CFA Exams
- 2025 Level II
- Topic 6. Fixed Income
- Learning Module 28. Valuation and Analysis of Bonds with Embedded Options
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Learning Outcome Statements PDF Download
| 1. Overview of Embedded Options explain the relationships between the values of a callable or putable bond, the underlying option-free (straight) bond, and the embedded option; describe how the arbitrage-free framework can be used to value a bond with embedded options; | |
| 2. Relationships between the Values of a Callable or Putable Bond, Straight Bond, and Embedded Option explain how interest rate volatility affects the value of a callable or putable bond; explain how changes in the level and shape of the yield curve affect the value of a callable or putable bond; calculate the value of a callable or putable bond from an interest rate tree; | |
| 3. Valuation of Default-Free Callable and Putable Bonds explain the calculation and use of option-adjusted spreads; explain how interest rate volatility affects option-adjusted spreads; | |
| 4. Option-Adjusted Spread calculate and interpret effective duration of a callable or putable bond; compare effective durations of callable, putable, and straight bonds; describe the use of one-sided durations and key rate durations to evaluate the interest rate sensitivity of bonds with embedded options; | |
| 5. Duration compare effective convexities of callable, putable, and straight bonds; | |
| 6. Effective Convexity calculate the value of a capped or floored floating-rate bond; | |
| 7. Valuation and Analysis of Capped and Floored Floating-Rate Bonds describe defining features of a convertible bond; calculate and interpret the components of a convertible bond's value; describe how a convertible bond is valued in an arbitrage-free framework; compare the risk-return characteristics of a convertible bond with the risk-return characteristics of a straight bond and of the underlying common stock. | |
| 8. Valuation and Analysis of Convertible Bonds explain expected exposure, the loss given default, the probability of default, and the credit valuation adjustment; |
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