anyone remember the diff performance results for callables/non callables; putables/non putables (ie. how they react in various environments) i remember these coming up a couple times in the practice exams.
callables underperform when rates drop callables overperform when rates rise but are below coupon rate callables act similarly when rates are very high
Material didn’t say too much about the relative performance of putable bond, however, for a putable bond, it must performe better than non-putable when rate are going up. One thing, the material point out is the lack of historica data on putable bond, plus, most performance doesn’t incorporate the risk of issuer’s ability to be putted on by the investor. For example, how comfortable are you with an Enron putable bond?
FT - so callable will outperform non callable when rates rise as long as the int rate rise is below the coupon rate on the bond?
yes, because you get higher yield
gotta love the scene in “old school” where vince vaughan writes his test wired up with all his stereo/electronic equipment to cheat his way through the exam! Sure would be nice to be wired up going into this one.
if interest rates rise above the coupon of a callable bond, will the callable bond then change from overperforming to underperforming a non callable?
it will perform like a non-callable. it only underperforms when rates go down.
thanks FT