Putable bonds beyond, critical, question, statements, increase

YouCanDoIt

Can anyone help me shed some lights to this question:

An analyst makes 2 statements:

1- As yield rises, the price of putable bond will fall more quickly than similar option free bond ( beyond a critical point) due to decline in value of embedded put option

2- As yield falls, the price of putable bond will increase more quickly than similar option free bond ( beyond a critical point) due to the increase in value of embedded put option.


DOes this hold true for put option embedded in bonds: As yield rise, put option decrease and vice versa, or this only applies to option on stock?

Thanks

sanbaidaniella

can somebody make sure about this point? Thks

rkapoor

Both those statements are incorrect.

When yields rise, the price of the bond will fall but the put will rise. so the overall price fall will be less than a regular bond.

When yields fall, the bond price will rise but the value of the put will fall. So the overall price increase is less than a regular bond.