Read this in the text, but do not understand why this would happen.
I would assume that if interest rates were to rise (so as the put option becomes in the money), the putable bond would be “put” back to par by investors, where as the callable bond would continue to decline.
Thanks,
For context, Keep_Running is referring to section 4.2 in reading 37. The sentence states: “Compared side by side, putable bonds have more upside potential than otherwise identical callable bonds when interest rates decline. In contrast, when interest rates rise, callable bonds have more upside potential than otherwise identical putable bonds.” This confused me as well. I think the first part makes sense because we are subtracting the call option value from the callable bond (callable bond = straight bond - call option), and the call option becomes more valuable as interest rates decline (i.e. it gets closer to being in the money), making the callable bond less valuable and giving the putable bond more upside potential in comparison. In the second part of the statement three things are happening. 1) Rising interest rates are reducing the value of the straight bond, 2) the put option is becoming more valuable (increasing the value of the putable bond), 3) the call option is becoming less valuable (increasing the value of the callable bond). So is the statement saying that rising interest rates decrease the value of the call option faster than they increase the value of the put option? Looking forward to hearing clarifications.
Anyone? MRL is also confused on this topic
Its called an error…
Errata 2018: https://www.cfainstitute.org/-/media/documents/support/programs/cfa/2018-level-ii-errata.ashx
Reading 37: In the paragraph just before Example 7 (page 158 of print), replace the last sentence with “ Putable bonds also have less downside risk than otherwise identical callable bonds when interest rates rise.”
Oh yes!
exactly why im here. love to see that