a decrease in yield volatility will decrease the value of an embedded call option. A decreasae in the value of a call option will increase the value of the convertible bond… can anyone explain pls?
conv bond value = option-free bond value - call option value + converstion option value Remember this formula. If you have studied the other fixed income parts, this should be intuitive and when yield volatility decreases, a call option (and also a put option) decreases in value. Since this is subtracted, the convertible bond value increases.
less vol = less option value = decrease in call option value. Assuming the bond is callable by the Issuer, the Investor in the bond is short the call option, so if the call option decreases in value the value of the bond increases. Think of it as Bond value = value of cash flows - value of call option
got it thanks