If interest rate volatility increases, which of the following bonds will experience a price decreases? a.) callable b.) putable c.) a zero-coupon, option free bond d.) an option-free 4% coupon bond Which of the following bonds has the greatest interest rate risk? a.) 5% 10 year callable bond yielding 4% b.) 5% 10 year puttable bond yielding 6% c.) a 5% 10 year option free bond yielding 4% d.) a 5% 10 year option free bond yielding 6%
A D Where you getting these questions from, they are damn good.
B A
1a 2 a or b, but i am too lazy to think about it
nice work pepp, schweser texts, I gotta admit their questions are very nice for review
pepp was right, a & d
for question 2, i dont see how you say that a bond that has an option associated with it has more interest rate risk. An option reduces the interest rate risk, that’s the whole point of options. I am thinking common sense, don’t know the computations for these.
Your right Pepp, I wasn’t thinking clearly. No computation needed really.
Can somebody explain 2? Due to Option can rise interest risk in general…
C & C.
Damn, I got it wrong!!
You are stuck with a 10 yr bond, no chance of it being called and getting a different interest rate. Rates are higher than the coupon so you could be getting a better rate. I think…
value of callable bond: option free bond - call option value of putable bond: option free bond + put option when interest rate volatility increases the options for both bonds increase, therefore callable bond decreases and putable bond increases. In general, option free bonds have greater interest rate risk then option free. Why? at lower yields, callable bonds but a max price appreciation, less risk for issuer at higher yields, putable bonds have the putable price as the minimum, less risk for the bond holder.
think of duration, bonds with longer durations and lower yields have more interest rate risk. For review: longer time, lower coupons, lower yields higher duration less time, higher coupons, higher yields, or a call/put, lower duration
CORRECTION!!! sorry guys just realized I wrote the right answer for 2 was d but it is infact C to recap: 1.) a 2.) c
Question 1 is clear to me. But Q2: > In general, option free bonds have greater > interest rate risk then option free. Why? Häh? What do you want to say? > at lower yields, callable bonds but a max price > appreciation, less risk for issuer > at higher yields, putable bonds have the putable > price as the minimum, less risk for the bond > holder. I still don’t understand anything…
bonds with options have less interest rate risk, therefore a and b are wrong with two identical bonds with the same time to maturity, the one with the lower yield will have higher interest rate risk
Can you varify answer to quesiton 2? lower yield bond should have greater interest risk. I choose C.
Why do they have a lower interest rate risk? Second explanation is ok to me…
you are right hopetobeat, C is the correct answer for Q2