Would it be right to say that the effective duration of an option free bond is the lowest as compared to callable and putable bonds, in general?
If yes, then how would one explain the callable/putable bond exhibiting the price-yield profile of an option free bond when out of the money?
No, quite the opposite. Duration is lower with an
option embedded all things equal.
(1)Duration of bond with option is shorter.
The purpose of the option is to breach the straight bond when the market condition is favorable.
(2)when it is out of money, the option is worthless, as if the option never existed.
So the optioned embedded bond and the straight bond are almost equivalent.
Yes. That’s what I’ve known too. I got confused because I read somewhere that ‘interest rate movements have very little impact on straight bonds’ or something to that effect.