Saw the line on page 80 of CFAI text (Volume 4, Reading 30) at the bottom of the page: “this structure should be favored as an outperformance vehicle only by those investors with a decidedly bearish outlook for interest rates” not sure about this one. is an interest rate bear thinking rates will increase or decrease?? i would think decrease. does anyone know the convention?
I am not sure the context of the CFAI text, but in general it depend what you own… If you own bonds, then interest rate going up is bearish. If you are long a cap, interest rate going down is bearish…
I think it means increase An investor wants to buy putable bonds to protect if he thinks interest rate will go up, because he can " put" the structure back to the issuers once interest actually increase and price of the bonds decrease.
My understanding: The convention for bearish interest rates outlook means interest rate going UP, hence bond prices coming DOWN.
pmoonoi Wrote: ------------------------------------------------------- > My understanding: > The convention for bearish interest rates outlook > means interest rate going UP, hence bond prices > coming DOWN. That’s right, and it says so explicitly elsewhere in the level III curriculum, somewhere in volume 5.
interest rates going up makes value go down - does not matter if you are taking bonds or equity.
dmoxson Wrote: ------------------------------------------------------- > interest rates going up makes value go down - does > not matter if you are taking bonds or equity. I thought bond price and equity price move in opposite direction. REcall during recession and bear market (equity prices are down), i/r has to drop to increase consumption, private sector spending etc. to boost economy/ market.