When int rates rise both callables and puttables outperform wrt bullets… How do puttables perform in comparison when int rates go down? Are puttables also referred as ‘put structures’
I think puttable bonds have greater positive convexity than other bonds. But im not sure about this one.
What i know is that both callable and puttable bonds outperform in bearish markets… would like someone else’s input on this one.
Putable bonds do well in high interest rate environment because if interest rates rice, price of the bond will decrease; thus ill execise the put to redeem the bond back at par.
However, callable bonds outperform in the way that if interest rates rise, the price of the call will not fall as much as other non-callable bonds would.
If interest rates fall, callable bonds will not appreciate in price as much as non-callable bonds would but what about puttable? Shouldn’t they appreciate in price more than other bonds due to their added positive convexity?
IMO putables actually underperform bullets ie. have lower gains.
I think it’s because bullets over w ST and under w LT thus they are more affected by a decrease in rates which will give higher increase in price than the increase in price in puts; however puts overperform normal bonds
So if interest rates decrease, its bullet, put, normal bonds, callable.
If interest rates increase, calls > put > bullet .
If interest rate volatility increases Bullet > Put > Call since price callable = price - value of call (if v increases, value of call increases so price decreases).
If interest rate volatility decreases Putable price = price + value of put, so if it increases, value increases and put would outperform call … but not sure about bullets.
I remember the Itemset Mock Exam. Spong Q5 is about this.
But Bilal,
regarding what you said about when interest rate rises, the callable bond should outperform, “However, callable bonds outperform in the way that if interest rates rise, the price of the call will not fall as much as other non-callable bonds would.”
Shouldn’t the callable bond actually underperform non-callable bond because the call option is worthless, and therefore given a higher base (with the call premium), it should underperform right?
Because of the negative convexity, the callable bond will not fall as much as non callable.
negative convexity decreases the effect of both increase and decrease.
If rates fall, the bond p will not rise as much as others would and vice versa with regards to increase in interest rates.
And because bullets over w ST, if interest rates rise, their price will fall more than callables would since they are more affected now than later. That’s how i see it…
Bullets benefit more than puts cause cause over w short term so their increase would be more than puts but i believe puts would outperform normal bond.
Just read - puttables are like option free bonds when int rates r low
^^ +1 from me.
When rates are low: putables=bullets=normal bonds (or whatever you call them). Callables lay beneath.
When rates are high: callables=bullets=normal (or whatever you call them). Putables lay above.
if rates are high callables and puttables outperform bullets… i didnt get what you mean by callables=bullets=normal (or whatever you call them). Putables lay above.
just imagine a graph and you’ll see
My two cents
Put tables would underperform bullets when rates fall since the bond needs to be put back to the bond holder while the bond price is rising. the option holder would rather hold the bond when prices rise than have to put it back.
They outperform when rates rise since the option holder puts a bond back whose value is falling. So he does not want to hold a bond of falling value so he gets the opportunity to put it back.