Bond Option

DEFINITION of 'Bond Option'

An option contract in which the underlying asset is a bond. Other than the different characteristics of the underlying assets, there is no significant difference between stock and bond options. Just as with other options, a bond option allows investors the ability to hedge the risk of their bond portfolios or speculate on the direction of bond prices with limited risk.

BREAKING DOWN 'Bond Option'

A buyer of a bond call option is expecting a decline in interest rates and an increase in bond prices. The buyer of a put bond option is expecting an increase in interest rates and a decrease in bond prices.

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RELATED FAQS
  1. What does it mean when a bond has a put option?

    A put option on a bond is a provision that allows the holder of the bond the right to force the issuer to pay back the principal ... Read Answer >>
  2. What determines the price of a bond in the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market, and why bond prices and yields ... Read Answer >>
  3. What causes a bond's price to rise?

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  4. Do long-term bonds have a greater interest rate risk than short-term bonds?

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