How would you remove the callable feature from a callable bond?
purchase long futures position in a non callable bond?
use OAS or include a prepayment schedule? just guessing that’s for removing the impact on yield to maturity to remove it for good, i guess buy another call option
answer was to sell a receiver swaption (CFAI books) by doing so, when rates decrease the buyer of the swaption will use it to receive fix and as rate decrease, the callable feature of the bond will be used too in order to refinance
WTH is sell a receiver swapation. I’m assuming it’s enter a payer swapation. whoosh…that’s this whole concept going right over my head.
same for me, I thought interesting to post it because it’s not really mentionned in Schweser And to be complete, adding a callable feature to a non-callable bond can be done by…buying a receiver swaption
That’s not an LOS.
I dont think so. dont remember this Q. BUt when rates go down, I need the money to be compensated for this negative convexity. SO I buy rcver swaption. ( I get fix and I pay floating ) If you sell rcver swaption, interest goes down and the CP exercise the swaption to rcv fix rate, that means I have to pay higher fix rate and rcv lower floating rate, which does not cover the loss from the negative convexity. I am double punched! I think what you should do is you buy rcver swaption. rates go down and you want to get fixed rate and you EXCERCISE your right to rcv fixed rate!
nicol what page was that?
Sell receiver swaption. If market rate goes down, other party exercise the option. You pay swap rate. Enter into a new swap at the market rate (receive fixed) Recall bond and reissue at lower rate Basically you pay the same rate you were paying before.
Yes, this is from an issuers standpoint, not an investors.
Ozzy609, I know what u mean but the question asked for ‘removing call option’ not ‘reducing call option risk’
Hey, this makes sense right? If you are the issuer of a fixed-coupon non-callable, and you want to take advantage of lower rates, in essence, make it callable, you would buy a receiver swaption. Rates go down, you exercise, receive fixed (covers your existing debt payments) and pay floating. You can then reissue at a lower rate. So… it makes sense if you are the issuer of a callable, to remove the call, obviously done if you think rates are going up, you sell the receiver swaption. If c/p exercises, and rates keep going up, you’re happy because you are getting floating. If c/p exercises, and rates go down, well, there goes your call option, you’re stuck paying more. Woo hoo! Right??
ok, ithought it was the investors point. just dont understand why an issuer wanna take out (remove ) the callable feature from callable bond when interest goes down. he should be happy. caz you can call the bonds. something wrong with me?
Sterling 76, you can’t reissue a non callable bond. Also, If the rate is going up and I have a receiver swaption, I might not exercise it.
tom18606 Wrote: ------------------------------------------------------- > Sterling 76, you can’t reissue a non callable > bond. Didn’t mean reissue - issue. By covering the fixed payments with the swap, you are technically calling the bond. You can then issue a new bond at a lower rate. > Also, If the rate is going up and I have a > receiver swaption, I might not exercise it. If rates keep going up, you don’t care if it’s not exercised. You took in the premium on the swaption because you believe rates will stay the same or go up. Like selling a call on stock.
sorry page 482 book 5 of CFAI books
This is related to example 14.A, Vol 5, page 524. Appreciate it if some expert can explain why set exercise rate = coupon rate - credit premium.
deriv108 Wrote: ------------------------------------------------------- > This is related to example 14.A, Vol 5, page 524. > > > Appreciate it if some expert can explain why set > exercise rate = coupon rate - credit premium. Credit premium is related to credit risk of the firm which will remain whatever bond you issue. We are trying to hedge or cancel the interest rate risk.
Many Thanks.