Embedded Option
 |
Definition of 'Embedded Option'A provision in a security that is an inseparable part of the other instrument. 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. |
|
Investopedia explains 'Embedded Option'A call provision, for 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 bond, however, an embedded option may give the holder the right to exchange the bond for 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 potential 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 otherwise be entitled if the bond were held to maturity (assuming the issuer does call the issue). |
Related Definitions
Articles Of Interest
-
Options Basics Tutorial
Discover the world of options, from primary concepts to how options work and why you might use them. -
Principal-Protected Notes: Hedge Funds For Everyday Investors
PPNs guarantee to return at least 100% of the original investment and have the potential to return much more. -
Making It Big On Wall Street
Read about some of the most glamorous Wall Street jobs and what it takes to land one. -
Quants: The Rocket Scientists Of Wall Street
Blend math, finance and computer skills to command a high - and well deserved - salary. -
Why Your Pension Plan Has Sovereign Debt In It
One type of security pensions tend to invest in is sovereign debt, or debt issued by a government. -
Build A Baby Berkshire
Get a piece of Warren Buffett's profit by using Form 13F to coattail his picks. -
Cash: A Call Option With No Expiration Date
Cash is generally regarded as a drag on investment returns, but sometimes it may be preferable to hold a substantial cash amount instead of investing it in other assets. This is because having ... -
Should You Add A Securities License To Your Qualifications?
Clients love planners who sell securities, but a securities license takes a lot of work. Learn if the stress and study are worth it. -
Business Grads, Land Your Dream Job
Companies are in need of strategic candidates, not walking resumes. Find out how to set yourself apart from the pack and land the business career you've always wanted. -
Exploring Non-Dollar Currencies For Forex Trading
Learn how investments in foreign currencies can diversify your portfolio.
