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Embedded Option
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An option that is an inseparable part of another instrument. Most embedded options are conversion features granted to the buyer or early termination options reserved by the issuer of a security. A common embedded option is the call provision in most corporate bonds which permits the issuer to repay the borrower earlier than the nominal maturity of the bond. The home owner's option to repay mortgage principal early-resulting in early liquidation of a mortgage-backed security-is another common embedded option. Also called Embeddo, Imbedded Option. See Call Provision, Latent Call Option, Latent Warrant. See also Prepayment Option (2).
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