Fixed Income Risk - Optionality

Overview

Many fixed income instruments have an embedded option within them. That is, while the security's payments are contractually specified, the borrower or issuer of the security may have the right alter those payments. The most common type of option is the option to pre-pay the loan or bond. That is, the borrower pays off the principal on the loan early, and foregoes having to make any further interest payments.

• Mortgage - One of the most common instruments with an embedded option is the American morgage
• Bonds with an Embedded Call Option

see fixed income derivatives