# Multi choice - Convexity, price change and interest forcast

To my fellow bear runners Suppose you have both callable and puttable bonds and you expect interest rates to increase in the future…compared to bullet bonds do you expect A Callable= Outperform and Puttable = Outperform B Callable= Underperform and Puttable = Outperform C Callable= Outperform and Puttable = Underperform Hint CFAI Vol 4 pg 165

I think it depends on the ranges of the I/R changes. But if an answer must be chosen, I will say A.

i also say A

Callable=noncallable - call option noncallable goes down call option goes up callable goes down – underperform putable = non putable + put non putable goes down put goes up so undecided … but maybe outperform so B - under/out

i messed up both outperform … price goes down…

if int rates go up, callable will not be called and they will pay a spread premium, so they will outperform a bullet

I/R goes up, the price down of callable will be less than that of option-free bond. So callable will outperform.

I’m going with A

yes the answer is A …but one question doesnt the Hint CFAI Vol 4 pg 165 give you the impression that negative convexity bonds would underperform?

Yes but callable bonds exhibit positive convexity when rates rise. Only when rates decrease they exhibit negative convexity.

mik82 my thanks to you.