Can someone help me understand how interest rate volatility affects duration of callable bond Thanks in advance
Interest rates go down the bond is more likely to be called. Increased volatility increase likelyhood of decrease (and increase) in interest rates. So with interest rate volatility bond value will decrease. I suppose duration will shorten as well.
Pay attention in questions when they ask if its better or worse for the INVESTOR or ISSUER. Callable/Putable bonds will yield different results. Vol is bad for a holder of a callable but good for a putable and vice versa for an issuer. Very simple to gloss over this as you read.