It is a call option on a bond; a bond option which gives the holder the right, without the obligation, to buy a specific bond at a given price on or before a preset expiration date. Typically, a bond call option will have a lower value if the long-run interest rate is higher than the spot risk-free rate and, likewise, if the rate of spot rate reverting to long-run rate level is high. In the same token, the value of a bond call option will be higher if the long-run interest rate is lower than the spot rate and if the reversion rate is high.
November 13, 2023