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John10

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tT
发表于 2011-7-11 19:36 | 只看该作者

Par, Callables, and Interest rate Movements

higher, falling, interest
I just want to verify my logic...


Callables have negative convexity in a falling rate environment where the interest rate drops below the coupon.

This would make it negatively convex ABOVE par right?

Prices should be greater than par when rates are lower than the coupon and lower than par when rates are higher than the coupon right?

I know this is L1, but I'm just confirming my logic...
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mar350

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发表于 2011-7-11 19:36 | 只看该作者
No comment?

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skycfa

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发表于 2011-7-11 19:36 | 只看该作者
Ur right. Mbs for example will experience positive convexity if they are trading below par.

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Roflnadal

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4#
发表于 2011-7-11 19:36 | 只看该作者
You are right.

Straight bonds rise faster when yields fall and this rate is higher than the price fall rate when yields rise. For MBS, the rate of price rise will reduce as yields fall; a phenomenon called yield compression.

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