embedded option

Embedded option

An option that is part of the structure of a bond that gives either the bondholder or the issuer the right to take some action against the other party, as opposed to a bare option, which trades separately from any underlying security.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Embedded Option

An option or other special provision attached to a bond. For example, an embedded option in a convertible bond is the ability of the bondholder to exchange the bond for shares in the underlying common stock. Likewise, an embedded option may enable the issuer to call a callable bond before maturity. It differs from a bare option, which is the trading of a standalone security separately from any bond.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

embedded option

A provision within a security giving either the issuer or the security holder the right to take a specified action against the other. For example, a call provision is an embedded option in a bond that gives the issuer the right to redeem the bond prior to the scheduled maturity.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
An exchangeable bond is a type of hybrid security that may comprise of a straight bond with an embedded option to exchange that bond (at a later date) for the stock of a company other than the issuer - such as a subsidiary of that issuing company.
The final price of the option is calculated as the difference of the bond without and with the embedded option. It is also observable from tab 1 in the Appendix.
From the quick start link that opens, select the embedded option and then pick Linux*.
In that case, the BCNs may not be considered readily convertible to cash and the embedded option would not qualify as net settled and, therefore, would not be a derivative.
With these parameter estimates in hand, we use the Hull-White model to compute the option-adjusted duration for each bond with an embedded option and generate the model-implied price and duration for the option-free bonds with missing price data.
This project has an embedded option to expand by another 100 million tons per year.
Of course, our pricing model does not allow for more sophisticated financial hypothesis, such as stochastic volatility or jumps in the fund process and term-structure effects, but as Milevsky and Salisbury (2006) we are confident that these considerations will only increases the price of the embedded option. The same effect would be obtained with the introduction of an actuarial model allowing for the longevity risk.
* A dual axis design, expandable to 6 axes, with an embedded option for controlling bipolar stepper motors with currents of up to 2.5 A per phase and up to 35 VDC.
embedded option while capturing the entire value of that option.
Collateral is another type of embedded option. By offering a bondholder the security associated with collateral, a company can issue the debt at a lower yield than the overall credit quality of the firm would dictate.

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