Fixed income question

i was doing practice problems for reading 66 on CFA textbooks,

the question 20 says:

at yield levels that are close to the bond's coupon rate, the price of an option-free bond higher than the price of an otherwise identical callable bond, but not higher than an otherwise identical putable bond.

I understand the negative convexity thing, but i don't get what does 'at yield levels that are close to the bond's coupon rate' mean?
why is that identical to relatively low yield levels?

shootingstar

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发表于 2011-7-11 17:41 | 只看该作者

When the coupon rates are close to yields - eg. coupon rate 6% and yield 6.001%.

If the two rates are very different the statement may not hold true - (the ceteris paribus thing!). For instance if the yield is much higher the bond price of the option fee bond could actually be depressed to a value lower than the bond with a the call option. Remember the callable bond price is (other things being constant) less because of the risk of the call to the investor.

I am not sure whether this helped?

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