When the yield curve is upward slopping we know the following:
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Call option is unlikely to be exercised and has a low value, while the put option is valuable.
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When the yield curve flattens, the call option becomes MORE valuable, while the put option losses value.
With regards to point 1) Isnt that a positive for a callable bond? ie the option is worth less, so the bond is worth more in an upward sloping curve.
with regards to point 2) When the curve flattens, a callable bond will UNDERPERFORM - however which will perform better in a curve flatten environment, a putable or a callable bond? Does anyone have any better logic to understand this?