IAmNeil

Char-Lee Wrote:
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> i wouldn't say that, just because a bond has a put
> price at 80 cents on the dollar doesn't mean the
> price/yield curve is asymptotic and approaching
> 80... if rates are high and there is concern with
> the borrowers ability to refinance (because of
> credit issues or lack of financing options) then
> that bond will certainly trade below 80... just as
> callable bonds can trade higher then their call
> price.


Yeah but that assumes credit risk. A callable bond that has an american call (continuous) in a default free low transaction cost environment, a callable would very rarely trade above call unless there was a good reason why the market thought the bond would not be called (maybe the market knows the issuer has a hedge behind). A callable will trade above par if the call structure is one time or discrete, at which point the market can trade a bond at the yield to call or yield to next call.

Assume you had a continuously putable default free bond with a put price of 100. Assuming a rational market, if anyone offered the bond at less than par, a trader could instantly buy the bond and exercise the put for an arbitrage profit. Therefore the floor price of the bond is the put price. Graphically, this represents more POSITIVE convexity than a non callable non putable bond as the price curve is more convex.