deep2002 Wrote: ------------------------------------------------------- > This is a bond, its not the same thing as calls on > stocks. On a bond, the call option decreases in > value when rates rise. Ah I think I got it. Thanks. Rates up, PNCB down. PNCB down = PCB down, but not as much since the call is still positive?
answers please!!! u r killing us now
cfaboston28 Wrote: ------------------------------------------------------- > Sabaruch, > > I meant post the answers or give us the q-bank > question number. Sorry…here it is from schweser. Tomoko now turns her attention to the value of the embedded call option. How does the value of the embedded call option react to an increase in interest rates? The value of the embedded call: A) decreases. B) increases. C) remains the same. Your answer: B was incorrect. The correct answer was A) decreases. Since the underlying asset to the option (the bond) decreases in value the option must decrease in value also. (Study Session 14, LOS 55.e, f)
callable bond is subjected to negative convexity so the bond increases slowly compared to straight bond and decreases fast compared to straight if int rates go up.
I’ll just repeat myself: An increase in interest rates will decrease the value of the embedded call because it will bring the call further out of the money. A call on a bond increases in value when interest rates decrease. This hurts the bondholder and will decrease the value of the bond to the bondholder but increase the value of the bond to the issuer. Just think about it. People do not refinance their mortgages when rates go up
chowder Wrote: ------------------------------------------------------- > callable bond is subjected to negative convexity > so the bond increases slowly compared to straight > bond and decreases fast compared to straight if > int rates go up. So, if the call option is near or at the money, it would still have some sort of value, wouldn’t it? So when rates increase the call loses value, and will equal the value of the noncallable once the value of the call reaches 0?
It caught me on the option value change. If you draw a graph(P/y) for callable bond and non-callable bond, the callable bond is below the non-callable bond, and difference between the two curves reduces gradually to 0 if yield increases.
deriv108 Wrote: ------------------------------------------------------- > It caught me on the option value change. > > If you draw a graph(P/y) for callable bond and > non-callable bond, the callable bond is below the > non-callable bond, and difference between the two > curves reduces gradually to 0 if yield increases. Thanks!
It’s a shame you need a graph to figure out the answer to this question
call value positive corelation to its under lying call value reduces with underlying as long as impied vol remains constant
Or simply like this: embedded call is to protect bond issuer when rate is lower. So when rate is higher, call is worth less – no need to call it. yes, it’s a shame for me. the graph is on the front page of L1 book.
lol, I’m only kidding, whatever works
page 96 of FI book
interest rates up = callable price down, call option itself is worth even less as with falling bond prices, the likelihood that itll get called is even less, so the call value must go down. So is the Answer A?
The answer to 4 is C, right?