anyone think it is right? I think could state callable bond is relatively premium to its intrinsic value for scarcity but can not state it is trade at premium .
i dont recall seeing that anywhere what i do recall is the cfai stating that puttable bonds should trade at lower yields than observed in the market
it is in schweser practice
I thought the same thing. I understand it’s scarce but in this case, it’s scarcity is due to an embedded option that benefits the issuer so why would longs bid it to a premium? I guess you could say callables have higher coupons compared to comparable bullets to compensate for the callability risk so if you don’t expect rates to drop, you would place a premium on it. In any case, what cfai says goes at least for the next five days.
i think Jorgeam86 is onto it " guess you could say callables have higher coupons compared to comparable bullets to compensate for the callability risk so if you don’t expect rates to drop, you would place a premium on it." I agree with this
in the book “credit securities with embedded options have become rare and therefore demand a premium price. Typically, this premium (price) is not captured by option-valuation models. Yet, this “scarcity value” should be considered by managers in relative-value analysis of credit bonds.” I think the premium price is relative to its base value . but doesn’t mean it will trade at premium for it is discount to noncallable bond. anyway schweser is ambiguous
Yes, by premium I assumed they meant lower yield than they would based purely on the modeled value of the option, not a lower yield than a non-callable bond. I.e., the market assigns a lower value to the option than the model does.