After completing a question from Book 5. I am a little confused. Why does a Negative Convex curve most likely represent a high coupon bond?
Which question is this? Can you provide the pg# and q#? Here’s my understanding: When a bond is trading at a premium and you hold it to maturity, the price of the bond will go towards the par value. That’s why it is negatively convex. If you hold a discount bond until maturity, the price will go towards par, hence it increases in value. The curve in convex in shape.
Sorry to add further to my comment: I’m assuming that when you say a high coupon bond, you are comparing to the current market yield, in which case it would be trading at a premium. Again, can you send me the question number?
Alphaseek is correct if you are looking at price against time to maturity. But if you’re looking at price vs yield I dont really see how that statement would hold true…
To add to what alphaseek said about higher coupon n current market yield… Negative Convexity (curve bending over towards left as opposed to regular curve of a option free bond) scenario is likely to be seen in case of a callable bond and a bond can be called to replace a higher coupon bond with a lower market coupon bond. so…Negative Convexity --> Callable Bond --> Higher Coupon Bond. Guess am right here…
Yea…I dont think that statement is correct…sure callable bond has a negative convexity but you cant conclude a callable bond always has a higher coupon rate.
Agreed with sa.86. The only material covered in lvl 1 is that negative convexity applies to bonds with embedded callable options. And below a certain yield, the price-yield relationship would display negative convexity and the prices tends towards the call price. Correct me if I am wrong, still learning. =) Adrian