Callable bonds

CFA Level I
#1

Hi, thank you in advance.

I get that, a callable bond has a negative convexity at low yields, meaning that increases in YTM increase more the price than decreases in YTM decreases in price.

I just read that if the option value is positive (option value = Z - OAS) it is beneficial for the bondholder, not the issuer.

For a bondholder with a callable bond why would its option be positive when there are low interest rates (it should be positive for the issuer not the bondholder right?, I get that at low yields the call option becomes more valuable but for the issuer shouldn’t it, not for the bondholder, that is in risk of his bond being bought)

#2

The value of the option is the value of the option; it doesn’t depend on where you sit.

When the value of the option is greater, the option holder is more likely to exercise it (rather than risk that the value will decline in the future).

When you say that if the option value is positive it benefits the bondholder, what you mean is that the bondholder receives the premium for the option, either in the form of a higher coupon or in the form of a lower price. But the issuer owns the option; that’s the benefit to the issuer.

#3

Again, appreciate it S2000

#4

You’re welcome.