Of course, one reason is callable bond as interest rate goes down, the price flattens out but what’s the second reason?
you mean, negative convexity can occur?
Right, sorry that’s what I meant.
Less convexity when Interest goes up for Putable Bonds… http://2.bp.blogspot.com/_RUe4EZEDFco/ShMC8OxM7LI/AAAAAAAAAqU/P6_xugHA8VQ/s320/Putable+Bond.png
I would say MBS is the 2nd one, like pupdawg82
Yes, in case where they would exhibit Negative Convexity…
MBS and callable bonds are examples of securities that exhibit negative convexity. I meant to ask whether there is another way that a security can have negative convexity except when the interest rate goes down.