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CHAPTER 1 - FEATURES OF DEBT SECURITIES > X. EMBEDDED OPTIONS
X. EMBEDDED OPTIONS
As we have seen, it is common for a bond issue to include a provision in the indenture that gives the issuer and/or the bondholder an option to take some action against the other party. These options are referred to as embedded options to distinguish them from stand alone options (i.e., options that can be purchased on an exchange or in the over-the-counter market). They are referred to as embedded options because the option is embedded in the issue. In fact, there may be more than one embedded option in an issue.
A. Embedded Options Granted to Issuers
The most common embedded options that are granted to issuers or borrowers discussed in the previous section include:
• the right to call the issue
• the right of the underlying borrowers in a pool of loans to prepay principal above the scheduled principal payment
• the accelerated sinking fund provision
• the cap on a floater