If you own an extendible bond with a maturity date of 2010/2015, the price of the bond
is calculated with variables including the maturity date of 2010. what happens if
interest rates drop dramatically? is it likely that holders of these bonds will want to
extend the bond to a maturity of 2015? it is likely, because the alternative is to have it
expire in 2010 and take the proceeds and invest them in securities that now pay lower
rates of return. so in this case, its likely that those pricing the bond will use the most
likely maturity date: 2015. the bond is now priced as a longer-term bond.
what if, instead of falling, interest rates rose dramatically? most investors would want
the bond to mature at the earlier date so money could be freed up to invest in
securities that are now paying higher rates of return. if that were the case, then the
price of the bond would be calculated as though it were a shorter-term instrument.
you know that theyll be priced short or long term depending on what interest rates do
and depending on what the most logical step would be for an investor holding that type