Bonds with embedded options (affected at all yields?) 玫瑰

洞庭岛主

Hopefully final questions for a while...

Regarding bonds with putable options

-Does the option only decrease duration (compared to plain bonds) if yields are extremely high (enriching the option)?

-For callable, is duration only affected at low yields? According to CFAI....it says all yields.

Could use some clarification on exactly when they are affected.

barberry

-Does the option only decrease duration (compared to plain bonds) if yields are extremely high (enriching the option)?
Duration approaches 0 for putable bond when price approaching (decreasing toward) put price, the yield does not have to be extremely high, just high enough. You see the curve flattens out in the price vs. yield chart.

Callable: similarly, duration flattens at lower yields as price approaching(increasing toward) call price. Similarly you see the line flattens.

Not sure about I understand the last point. Duration for a calllable AND putable bond decreases both at low (enough) and high (enough) yield

chaojimali

muffin09 you can understand the best by drawing price yield graph and then it gets quite easy.

If you give me your email I can send you the notes regarding this and hopefully it will help you understand