Trying to wrap my mind around callable bonds. Where am I wrong? 1.) If I’m holding a callable bond, I’m short a call option so the value of the bond = Value of Non-Callable - Value of Call option. So a callable bond will always be cheaper than a non-callable. 2) As rates fall a n-c will outperform a c because of the embedded call option. 3) As rates rise -: 1. From below coupon up the c expresses convexity and will outperform the n-c. 2. From above coupon to higher the call option is o-f-t-m and both bond behave like n-c. Grade me!
this is incorrect: "1. From below coupon up the c expresses convexity and will outperform the n-c. " while the c will outperform, it still has negative convexity.
JSShekawat Wrote: ------------------------------------------------------- > Trying to wrap my mind around callable bonds. > Where am I wrong? > > 1.) If I’m holding a callable bond, I’m short a > call option so the value of the bond = Value of > Non-Callable - Value of Call option. So a callable > bond will always be cheaper than a non-callable. > > 2) As rates fall a n-c will outperform a c because > of the embedded call option. > > 3) As rates rise -: > > 1. From below coupon up the c expresses convexity > and will outperform the n-c. > 2. From above coupon to higher the call option is > o-f-t-m and both bond behave like n-c. > > Grade me! Wow talk about overthinking a simple concept.