Couldn't get the intuitive meaning - Fixed income, negative
Please someone help with the intuitive meaning of negative convexity, yield curve related aspects.. and the callable bonds .. out/under perform related to interest rates..
I’m sure there must be threads on these topics.. but couldn’t find them..
How to interpret the below -
“
Early Retirement Provisions
Due to the negative convexity caused by the embedded option, callable bonds do the
following:
1. Underperform non-callables when interest rates fall (relative to the coupon rate)
due to their negative convexity.
2. Outperform non-callables in bear bond markets with rising rates as the
probability of call falls. (When the current rate is lower than the coupon rate,
their negative convexity makes callables respond less to increasing rates.)
3. When yields are very high, relative to coupon rates, the callable bond will
behave much the same as the non-callable (i.e., the call option has little or no
value) |