Which of the following statement are correct with respect to the call risk faced by an instituition on its liability? I The consequence of the call will be that the institution has to reinvest at a lower interest rate II - The consequence of the call will be that institution has to find alternative funds and these are likely to be more expensive. Why I is wrong and II is correct? Can someone help me on the concept? thanks!
Well judging really quickly from the post, it looks like the institution is the borrower so they aren’t investing, they’re borrowing and therefore don’t have reinvestment risk. But if the bond is putable the investor may see that rates increase and want to lend at a higher rate and therefore make the institution buy back the bonds and risk borrowing alternative funds at a higher rate.
thanks
Kinda odd that the “call risk” here seems more like the “put risk”.