A call option enables its holder to purchase a security at a fixed price for a fixed period of time. Options are termed as contingent claims because their value depends on the value outcome of the other underlying asset. When the exercise price of the call option is less than the underlying asset price the call option is set to be in the money, when the exercise price is same as the underlying asset the option is  at the money and when the exercise price is more than the underlying assets price the option is out of the money. The holder of the option has the choice to exercise the option at the right time before the expiration of the call option if the call option is the American one,  and if call option is the European one it can be exercised only at its expiration. A call option can also be compared with the equity of a geared company due to its very characteristics.

In very simple words a Bond is a debt security which is issued by a company seeking to incorporate or extend debt in its capital structure. A bond has three main characteristics namely Principal ( face value), Coupon rate (interest rate) and the the Maturity period.

The Yield to Maturity: :

The YTM (Yield to Maturity) of a bond is  the IRR (Internal Rate of Return ) of its future cash flows (the interim interest payments and the final payment on redemption). It is the discount rate at which the  the present value of the bond’s cash flows equals its market price.

If the bonds of the same maturity and risk are arranged with their coupon rates ascending and if their YTMs turn out to be in descending order, this implies that the term structure  of interest rates( the spot interest rates ) is also ascending. This phenomenon,in finance ,is called the coupon effect on the yield to maturity.

Forward Interest Rates :

Forward interest rates are the interest rates that begin at some time point in future as the name itself is quite suggestive.A forward interest rate is usually noted with the letter f surrounded by a left subscript indicating the rate’s beginning time point,and a right subscript pointing the rate’s ending time point.

If the notations for the spot interest rates are- i1-for the first period, i2-for the two- period rate, i3-for the three-period rate and so on ,the relationship between the spot rates and the forward rates can be explained by  the following equations-

(1+i1) = (1+0f1)

(1+i2)(1+i2)=(1+0f1)(1+1f2)

(1+i3)(1+i3)(1+i3)=(1+0f1)(1+1f2(1+2f3)

Similarly other relationships can be drawn.