Putable/Callable bond volatility
Can anyone explain this to me, I cant find anything about it in the schweser books besides that an increase in the volatility of the price of the underlying asset increases the call/put option value
What effects will an increase in yield volatility have on the values of a putable bond and a callable bond?
Both bonds will increase in value.
Both bonds will decrease in value.
C. One bond will increase in value and the other will decrease. - correct
A callable bond is made up of a straight bond and a written call option. An increase in volatility increases the value of the call option and decreases the value of the callable bond. On the other hand, a putable bond is made up of an option-free (or straight) bond and a long put option. An increase in volatility increases the value of the put option and therefore increases the value of the putable bond.