Can anyone explain me about price of callable bond?
I don’t know if you are level 1 or level 2 so will explain as best as I can trying to use concepts from both. A call option on any asset is the option to have the asset given to the option holder at a certain time. An example would be that I own a call option on a gallon of gas. I can by a gallon of gas from you anytime this year at $3.50. Right now gas locally in FL is $2.70. You have a gallon of gas so you have an asset that is worth 2.70. It makes now sense for me to excerise so my option has little value. Now by labor day gas is $4. You still have that gallon of gas which is now worth $4. However, I may choose to buy that gallon from you for $3.50. If I do that you lose money on the transaction. I won’t definitely take that gallon from you, but as long as I’m in the money I might do that. That means the value of what you have is a $4 gallon of gas less the money that you would lose if I decide to excercise. Now change the gallon of gas for a bond or any tradeable asset. If you are
