LOS34.d - value of call option

CFA Level II Fixed Income
#1

Shape of the Yield curve:
(i) Value of an embedded call option increase as interest rate decline.
(ii) An upward sloping yield curve becomes flatter, the call option value increase.

My understanding is that: interest rate decrease >> price of bond increase >> >> price of callable bond increase >> price of call options decrease (Price of call = Price of straight - Price of callable). Why is it that when upward sloping yield curve becomes flatter, i.e. expecting lower interest rate, value of call option increase instead of decrease?

Please help :slight_smile:

#2

upward sloping yield curve becomes flatter,indicates that forward rate<spot rate,
f(j,k)=s(j,k)+liquidity premium,liquidity premium=f(j,k)-s(j,k)<0;the interests of investors are damaged, and it is good for the issuer of debt,value of call option increases.