Reading 23 Question 3

Why does consultant D who suggests buying Puts thinks interest rate are headed upward ?

I thought you buy interest rates puts when you think that interest are headed down ?

Thanks !

If i recall correctly, they aren’t interest rate puts… they’re bond puts.

Interest rate puts are put options on a bond.

3.2. Using Interest Rate Puts with Lending

Now consider an application of an interest rate put to establish a minimum interest rate for a commitment to give a loan in the future. A lender can buy a put that pays off if the interest rate falls below a chosen level. The put payoff then compensates the bank for the lower interest rate on the loan

(Institute 106)

Institute, CFA. 2015 CFA Level III Volume 5 Alternative Investments, Risk Management, and the Application of Derivatives. Wiley Global Finance, 2014-07-14. VitalBook file.

^ The text is widly inconsistent between interest rate puts and bond put options being the same in one section and different in the next.

I think we’ll have to disagree for the time being, Galli.

I agree with what you quoted but i’ve seen the CFAI EOC ask about Interest rate options when it meant bond options.

I look forward to being in agreement in the future

lol… i tend to agree with most of what you say on here. Just not this time.


If you are the bondholder and you expect interest rates to go up, you must buy a put on the bond. The put gives you the right to sell the bond at a certain agreed price such that when interest rates go up and because of the inverse relationship with bond prices, bond prices will go down, you will then sell your bond at the previously agrred price in the put and you will not lose. Buying the put establishes a minimum price for your bond you are holding.

They should give us some specifications about if the put are on the bonds or on the interest rates.

Not all bonds have puts options … this is what tells me that put on interest rates should be better here.

Still confuse.