callable bond when rates increase

So i know when rates rise a putable bond decreases at a slower rates than straight bond.

What about a callable bond? Is it the same thing?

Putable bonds:

  • Behave almost identically to straight bonds when YTM is low
  • Rise and fall more slowly than straight bonds when YTM is high

Callable bonds:

  • Behave almost identically to straight bonds when YTM is high
  • Rise and fall more slowly than straight bonds when YTM is low

No. Callable bonds have a higher one side up duration. Meaning, when rates rise, call option on bond will fall (possibly even become 0). When this happens, straight value also keeps falling when call value becomes 0.

Hope this helps.

OK i just found my answer… they both decrease at slower rate then straight bond.

Can someone confirm also that when rates decrease, a putable bond will increase at a slower rate than a straight bond even though the put is in your favor

I think S2000 and saurabh already gave you the answer, but just to help you, you should think about WHY what they said is true. That way, should a question come up on exam day, you can reason through it.

My hint: 1) think of YTM as what the issuer could issue debt for at par right now, and 2) think of who has the option in both the callable/putable cases, and when they would optimally exercise.

When rates fall, the up movement on putable bonds would be similar (but not same) to that of straight bonds. When this happens, put option drops in value and can even become 0. Despite that, straight value will keep rising pushing the bond value up and thats when it would become like a straight bond.

got it thanks dudes

is there any way to think of convexity in the same manner?

Although I know there has been a ton of replies, I always put myself in the actual shoes of either the bondholder or issuer. Typically, put options belong to holders and call options to issuers. Remembering the relationship between straight bond - call option and straight bond + put option helps me work through it logically when considering how they move given interest rates rising or falling.

Of course, you do not have to run hypotheticals and can just rely on memorization :slight_smile:

You’re thinking of it the way I was trying to lead others on this thread to think of it. If you understand that perspective, it becomes very hard to miss questions like this. Memorizing, on the other hand, is always risky in my view.

Ok I’m confused now. Could anyone summarise the final answer please.

1 callable bonds decrease at a slower rate than straight bond when interest rate rises.

2 callable bonds increase at a slower rate than straight bond when interest rate goes down

3 putable bonds price decrease at a slower rate when interest rate goes up.

4 putable bonds price increases at a slower rate when interest rate goes down.

im stuck on this for a very long time and want to get it right.

please help

None of your statements take into account the level of interest rates.

Reread my original comment above; there’s a difference in their behavior when the yield is high and when the yield is low.