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krause2

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tT
发表于 2011-7-13 13:52 | 只看该作者
Can someone explain to me in plain terms why callables and putables will outperform bullet structures in the yield curve steepening environment?

In bullet structure, you ensure the maturity of bonds around your liability time frame. Why would that cause an underperformance compared to callable and putable in steepening yield curve env.?

 

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NakedPuts00

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发表于 2011-7-13 13:52 | 只看该作者
I think you mean RISING interest environment, not steepening.

If so, you know that bond values drop when rates go up.

callable outperforms because the decline in value of your short call option offsets the decline in value of the bond.

for putable its because you have the option to sell the bond back to the borrower at par, so even if the bond value goes below par, you can sell for the par amount, and reinvest at the higher rates.

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justin88

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发表于 2011-7-13 13:52 | 只看该作者
dlpicket Wrote:
-------------------------------------------------------
> I think you mean RISING interest environment, not
> steepening.
>
> If so, you know that bond values drop when rates
> go up.
>
> callable outperforms because the decline in value
> of your short call option offsets the decline in
> value of the bond.
>
> for putable its because you have the option to
> sell the bond back to the borrower at par, so even
> if the bond value goes below par, you can sell for
> the par amount, and reinvest at the higher rates.

got it, but how do you compare them with bullet structure?

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