标题: Simple callable bond question [打印本页] 作者: wilslm 时间: 2013-4-8 19:21 标题: Simple callable bond question
If the yield rises, will the price of a callable bond fall more or less than the price an option free bond?作者: Analyze_This 时间: 2013-4-8 19:22
I would say less but I’m not 100% sure. If you think about it, as yields increase, there is less and less of a chance of a callable bond being called. (Why would a company call a bond during a period of high yields, when they’d have to issue new bonds at these higher yields?)作者: Andreas42 时间: 2013-4-8 19:22
I said less on this one. Since the bond won’t trade above the call price, changing YTM at low yields will have practically no effect on the price.作者: LPoulin133 时间: 2013-4-8 19:22
It will fall less. The price of the option also decreases, making the callable bond fall less.
Same thing for a putable bond–it doesn’t increase/decrease as much as option free bonds for given decreases/increases in yields.作者: bleach 时间: 2013-4-8 19:23
If yield increases the price of the call becomes worthless (basically becomes an OTM call option)…so the price should move more or less with the option free…and moreso as the yield increases to infinity…作者: dotamasta 时间: 2013-4-8 19:23
I kinda agree with you guys but im still confused. If you’re saying that the callable will fall less, that means at very high yields, the price of a callable bond is higher than the price of an option free (it has fallen less).
but look at this formula: callable = option free option cost
as you can see the callable price will always be smaller than the option free (or equal to it, if option cost is zero). so is callable is smaller, how does it make sense that callable does not fall as much and remains higher than option free at high yeilds?作者: noel 时间: 2013-4-8 19:24
Even at relatively high yields the option still has value to the issuer. Rates could still decrease at some point and it could end up being called.作者: Bad5shah 时间: 2013-4-8 19:24
so in conclusion
when yields rise, callable bond will not fall as much as option free bond
when yeilds fall, putable bond will not rise as much as option free bond
correct?作者: joehogue 时间: 2013-4-8 19:24
i think you have to look at this question from the point of view of moves to 0 and infinity….as the yield increases to infinity, the callable bond and the option free will act similiarly…when the yield decreases to 0, the putable bond will rise in tandem with the callable bond….as you approach 0 and infinity, respectively, the option values converge to zero.作者: jarobi04 时间: 2013-4-8 19:25
and im sure that there is a proper answer…which looks at int rate volatility and values the put/call option more mathematically (like the BS does for equity options) than we need for this purpose…i think for now we can just keep it simple and view it as moves to either infinity or 0…作者: NakedPuts2011 时间: 2013-4-8 19:25
alrite but for purposes of an exam question, is what i wrote above true作者: ftwcfa 时间: 2013-4-8 19:26
i’ve actually seen that exam question on schweser a few times and qbank….their answer is always that the prices of the option bonds will move similiary to that of the option free in either situation…they never got into more detail…
but i think thats a fair assesment..what you said above…you would assume that there is some economic value of holding the option versus not…so technically yea I think you are right…作者: yuoska 时间: 2013-4-8 19:26
I’m not sure why this is getting so much attention….
From the CFAI text, “…a decline in int. rates will result in an increase in the price of the callable bond but not by as much as the price change of an otherwise comparable optionfree bond.”
“…when int. rates rise, the price of a callable bond will not fall as much as an otherwise optionfree bond. “作者: chetan86 时间: 2013-4-8 19:26
thanks jmuc,
is it also true that when yields fall, putable bond prices do not increase as much as option free bond prices?作者: koba 时间: 2013-4-8 19:27
yes that’s also true. the price of the put option falls, taking away from the increase in the bond.作者: tango_gs 时间: 2013-4-8 19:27
hold on….just wanted to clarify….the call option detracts from the value of an option free bond….so in that case with an increase in yields…wouldnt the call option always be less than the option free?…and with a decrease in yields the option with the put will always be higher than the option free bond (since the value of a putable bond is more than the value of an option free bond)…the put option shouldn’t ever detract from the value of the bond….so it should always be HIGHER than a similar option free bond…and a call option should always be lower than a similiar option free bond.
could someone please confirm this?
