Hi,
For topic test Allardyce, question 4.
Scenario 2: Interest rate volatility remains at current levels and the yield curve flattens further, with rates in the zero- to one-year maturity rising and rates in the two-year maturity and above declining."
I don’t understand the answer, which states that the value of the putable bond will go up. if interest rate goes down, the value of the put option will go down, so how come the value of the putable bond increase?
if the interest rate goes down, the value of the Straight bond will go up, and this combine effect with the put option will be ambiguous. Does this has to do with the second phrase " with rates in the zero- to one-year maturity rising and rates in the two year maturity and above declining." ?