Multi choice - Convexity, price change and interest forcast

CFA Level III
#1

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

#2

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

#3

AMA read the hint and tell me if you wish to change your answer?

#4

My answer is still A.

#5

i also say A

#6

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

#7

i messed up both outperform … price goes down…

#8

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

#9

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

#10

I’m going with A

#11

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?

#12

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

#13

mik82 my thanks to you.