An embedded option is a provision in a security that is an inseparable part of the other instrument.

Puttable bond - Wikipedia

An embedded option is a special condition attached to a security, and in particular, a bond that gives the holder or the issuer the right to perform a specified action at some point in the future. An embedded option is part of another security, and as such does not trade by itself.

Nevertheless, it can affect the value of the security of which it is a component. A security is not limited to one embedded option, as there may be several embedded options in one security.

Raising Money Using Convertible Debt

A call provisionfor example, is an embedded option in a bond that would give the issuer the right but not the obligation to redeem the bond before its scheduled maturity. In a convertible bondhowever, an embedded option may give the holder the right to exchange the bond put option convertible debt shares in the underlying common stock.

The presence of embedded options affects the value of the security, and investors should be aware of any embedded options and the put option convertible debt outcome or impact. For example, a bond that has an embedded option, giving the issuer the right to call the issue, could be less valuable to an investor than a noncallable bond.

This is because the investor could lose out on interest payments to which he would delta airlines stock market be entitled if the bond were held to maturity assuming the issuer does call the issue.

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Final: Options Flashcards | Quizlet

What is an 'Embedded Option' An embedded option is a provision in a security that is an inseparable part of the other instrument. Debt Exchangeable for Common Stock Reverse Convertible Bond - RCB Callable Security Call Privilege Call Provision Expansion Option Conditional Call Option Bond Exchangeable Security.

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