Trying to wrap my mind around callable bonds. Where am I wrong?
1.) If I'm holding a callable bond, I'm short a call option so the value of the bond = Value of Non-Callable - Value of Call option. So a callable bond will always be cheaper than a non-callable.
2) As rates fall a n-c will outperform a c because of the embedded call option.
3) As rates rise -:
1. From below coupon up the c expresses convexity and will outperform the n-c.
2. From above coupon to higher the call option is o-f-t-m and both bond behave like n-c.
Grade me!作者: dyga 时间: 2011-7-13 13:26
this is incorrect: "1. From below coupon up the c expresses convexity and will outperform the n-c. "
while the c will outperform, it still has negative convexity.作者: wake2000 时间: 2011-7-13 13:26
JSShekawat Wrote:
-------------------------------------------------------
> Trying to wrap my mind around callable bonds.
> Where am I wrong?
>
> 1.) If I'm holding a callable bond, I'm short a
> call option so the value of the bond = Value of
> Non-Callable - Value of Call option. So a callable
> bond will always be cheaper than a non-callable.
>
> 2) As rates fall a n-c will outperform a c because
> of the embedded call option.
>
> 3) As rates rise -:
>
> 1. From below coupon up the c expresses convexity
> and will outperform the n-c.
> 2. From above coupon to higher the call option is
> o-f-t-m and both bond behave like n-c.
>
> Grade me!
