For a putable bond : why is the one sided duration higher if interest rates decrease compared a rate increase of same magnitude?
A rate increase brings the bond closer to ITM while a rate decrease makes exercise less likely and the bond behaves similarly to a straight bond?
I understand the concept for a callable bond. If rates increase a callable bond behaves similarly to a straight bond while if rates decrease, the option becomes more valuable, so the price increase will be capped around exercise price -> down duration must be less than up duration.
Hey there,
So in a putable bond the put option movement is directly proportional to interest rate movement i.e. if interest rates go up, put options will also go up as they are more likely to be exercised and vice versa. So in case of downward interest rate movements, the putable bonds one side direction will be high as the put option is less likely to be exercised and the bond will be in existence due to the lower interest rates. On the other hand, if rates rose then the bond would be put most likely, thereby putting it out of existence.
Callable bonds work in the reverse fashion.
Hope this helps.
Thanks for the reply - I think I got it !