If the volatility of interest rates increases, the prices of a putable bond and a callable bond will most likely:
Putable bond Callable bond
A) Increase Increase
B) Increase Decrease
C) Decrease Increase
Your answer: A was incorrect. The correct answer was B) Increase Decrease
In general, an increase in interest rate volatility increases the values of both put options and call options. A more valuable put option increases the price of a putable bond. A more valuable call option decreases the price of a callable bond.作者: Matori 时间: 2011-7-11 19:44
Value of callable bond = Value of straight bond - Value of call option on the bond
Value of putable bond = Value of straight bond + Value of put option on the bond
An increase in interest rate volatility raises the value of the call and the put option. However, because the investor is short on the call option in the callable bond, the value of the callable bond falls.作者: smartpants 时间: 2011-7-11 19:44
Thanks for this, I got this question wrong too and now it makes perfect sense.作者: lc26mizzou 时间: 2011-7-11 19:44
