Puttable and Extendible Bonds: Developing Interest Rate Derivatives for Emerging Markets

October 1, 2003

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Format: Chicago

Salih N. Neftci, and Andre O Santos. Puttable and Extendible Bonds: Developing Interest Rate Derivatives for Emerging Markets, (USA: International Monetary Fund, 2003) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper analyzes the price stabilizing properties of puttable and extendible bonds, their potential to help develop interest-rate derivative markets, and their use by governments. Their stabilizing properties imply that, when bond prices fall, prices for puttable and extendible bonds fall by less. Their embedded options work as a cushion and replicate the trading gains from hedging long-term bonds with interest rate derivatives. These bonds can help develop interest-rate derivative markets in developing countries and eventually increase demand for long-term government bonds. Informal evidence from OECD countries suggests that these bonds were useful in the 1980s, when interest rates were volatile.

Subject: Asset prices, Bonds, Economic sectors, Financial crises, Financial institutions, Financial services, Options, Prices, Short term interest rates, Sovereign bonds

Keywords: Asset prices, Bond futures, Bonds, Discount bond, Extendible bond, Financial markets, Fixed income securities, Interest rate derivative market, Option pricing theory, Options, Puttable bond, Short term interest rates, Sovereign bonds

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/201
Stock No:

WPIEA2003201
ISBN:

9781451874372
ISSN:

1018-5941

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