I am trying to work out how to value the following transactions. It should be straight forward, since it breaks down into a series of well known instruments, yet I am not sure how to evaluate it:
- Receive Cash payment amount of \$X
- Subsequent pay out \$Y per calendar month into perpetuity
- Have the option to "close out" the implied perpetuity, by paying the original received $X amount, any time after 1 year.
I would like to know how to value such an instrument, which consists of effectively:
- a perpetuity
- an embedded option
If I was to make such an instrument available to someone, how much would I sell it for?
As an interesting aside, this is clearly a debt instrument, and would be recorded in the other parties 'liability column'. What value would be recorded in the books? Clearly, not the original $X ...?