Extendable Bond

What Is an Extendable Bond?

An extendable bond, or extendable note, is a long-term debt security that incorporates an option that permits the bondholder to stretch out its initial maturity to a later date.

Figuring out Extendable Bonds

An extendable bond is a bond with a embedded option that gives bondholders, or issuers, the right to expand the maturity of the security. It very well might be viewed as a combination of a straight shorter-term bond and a call option to purchase a longer-term bond. Since extendable bonds contain an option to expand the maturity date, a feature that enhances the bond, they sell at a higher price, with a lower coupon rate, than non-extendable bonds.

At the point when the option to stretch out the maturity is given to the bond investor, the bond is priced as a put bond. In the event that the option to expand maturity lies in the hands of the issuer, the bond is priced as a callable bond. Contingent upon the specific terms of the extendable bond, the bondholder, the bond issuer, or the two players might have at least one opportunities to concede the repayment of the bond's principal, during which time interest or coupon payments keep on being made. Furthermore, the bondholder or issuer might have the option to exchange the bond for one with a longer maturity, at an equivalent, or higher, rate of interest.

Investors purchase extendable bonds to exploit periods of declining interest rates without accepting the risk implied with long-term bonds. At the point when interest rates are rising, extendable bonds act like bonds with shorter terms, and when interest rates fall, they act like bonds with longer terms.

Investors benefit more from this bond during periods of declining interest rates. At the point when interest rates fall, the price of longer-term bonds ascends to a greater degree than the price of shorter-term bonds. Subsequently, extendable bonds trade like they were long-term bonds. The reverse is the outcome on the off chance that interest rates increased.

The issuer desires to pay a lower interest rate than would somehow be the case, and the investor gains the possible upside of a longer-term bond with the price risk of a shorter-term bond. Since issuers keep paying interest on bonds that have been extended, the bonds will sell at a higher price (and lower yield) than different bonds since there is the possibility for a higher return. In short, the price of an extendable bond is the price of a straight or non-extendable bond plus the value of the extendable option.

An extendable bond is something contrary to a retractable bond. A retractable bond incorporates an option to recover the bond sooner than its original maturity period. Both extendable and retractable bonds are planned to furnish investors with the flexibility to answer changing economic conditions and to exploit developments in interest rates.

Extendable Bond Example

A bondholder has purchased $10,000 worth of extendable bonds, with a fixed interest rate of 1.25% each year and a three-year term, from the bond issuer. After those three years pass, assuming the rate is as yet positive, the investor chooses to broaden the bond's term for three additional years to lock there. The bond issuer could likewise decide to expand such a bond's term on the off chance that its rates are great for the issuer.

Features

• An extendable bond is a long-term debt security that gives bondholders the option to broaden its initial maturity to a later date.
• The price of an extendable bond is the price of a non-extendable bond plus the value of the extendable option.
• Extendable bonds can permit investors to exploit periods of declining interest rates without expecting the risk implied with long-term bonds.