Wise AF contributors - I am thoroughly confused now as to the effects of interest rate changes on the prices and components on option-embedded bonds, the reason being conflicting views from the old threads on AF vs. an option trade pal I know. So for the sake of all on AF, could cpk, dinesh, JDV, chebychev, lola, Super I etc. post a simple summary sheet here as to the effects on interest rate moves on both the total bond price, as well as the option embedded in it? Something like - Interest Rates Rise - Callable Bond - Total Price - Up/Down OFB - Up/Down Call Option - Up/Down Putable Bond - Total Price - Up/Down OFB - Up/Down Put Option - Up/Down Interest Rates Fall - As above. I don’t see anything on those lines in schweser so please help me out here, I’d appreciate it immensely!
High interest rates Call Bond < No Option Bond by Option Value No Option Bond << Put Bond (larger convexity) price difference increases as yields increase. Low interest rates Call Bond << No Option Bond (negative convexiity) price difference increases as yields decrease. No Option Bond < Put Bond by Option Value I think that’s about right… remember the graphs, those help a lot. JDV, OFB is option free bond.
niraj_a Wrote: ------------------------------------------------------- > Wise AF contributors - > > I am thoroughly confused now as to the effects of > interest rate changes on the prices and components > on option-embedded bonds, the reason being > conflicting views from the old threads on AF vs. > an option trade pal I know. > > So for the sake of all on AF, could cpk, dinesh, > JDV, chebychev, lola, Super I etc. post a simple > summary sheet here as to the effects on interest > rate moves on both the total bond price, as well > as the option embedded in it? > > Something like - > > Interest Rates Rise - > > Callable Bond - Total Price - Decreases but at a slower rate than comparable non-callable bond as short bond call loses value. > OFB - Up/Down What’s an OFB? > Call Option - Up/Down Decreases in value. > > Putable Bond - Total Price - Up/Down Decreases but has a limit as the bond can be put bvack to the issuer if interest rates rise too much. > OFB - Up/Down > Put Option - Up/Down Increases in value as it pays to put the bond back as it falls in value > > Interest Rates Fall - > > Callable Bond - Total Price - Increases but at a slower rate than comparable non-callable bond as short bond call gains value. Ultimately the gains are limited by the call option. > OFB - Up/Down What’s an OFB? > Call Option - Up/Down Increases in value. > > Putable Bond - Total Price - Up/Down Increases but at a slower rate than comparable non-callable bond as bond put loses it value. > OFB - Up/Down > Put Option - Up/Down Decreases > > > As above. > > I don’t see anything on those lines in schweser so > please help me out here, I’d appreciate it > immensely!
JDV, by OFB i meant option free bond. thanks for taking the time to lay it out for me, now lets hope i nail that question 
OFB then is obvious yes - price in opposite direction of interest rates and the rate of movement depends on duration and always positive convexity.