hariRaj

OK! Look at it from an investor's point of view.

Value of putable bond equals the value of an option-free bond plus the value of the put option.

A decrease in interest rate volatility reduces the value of the put option and therefore, the value of the putable bond falls. A fall in the value of the putable bond is equivalent to an increase in its market yield.


Value of prepayable (callable) bond equals the value of the option-free bond minus the value of the call option. (the investor is long on the option-free bond but short on the call option).

A decrease in interest rate volatility reduces the value of the call option and therefore, the value of the prepayable bond rises. A rise in the value of the prepayable bond is equivalent to a decrease in its market yield.