Contents -- I. INTRODUCTION -- II. THE STABILIZING PROPERTIES OF PUTTABLE AND EXTENDIBLE BONDS -- A. Hedging Long Positions in Long-Term Bonds -- B. Puttable and Extendible Bonds Written on Discount and Coupon Bonds -- C. Credit Risk Aspects -- III. MIMICKING MARKETS FOR INTEREST RATE DERIVATIVES ON GOVERNMENT BONDS -- A. The Brazilian Government Bond Markets -- B. Some Weaknesses of Emerging Bond Markets -- C. Measuring the Effect of C-Bond Volatility -- D. The Effect of Puttable Bonds -- IV. EXPERIENCE WITH PUTTABLE AND EXTENDIBLE BONDS -- V. CONCLUSION
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
Bibliography
Includes bibliographical references (pages 27-29)
Notes
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