medium · Debt Capital Markets
Why is 'Negative Convexity' a characteristic of callable bonds when interest rates fall?
- The coupon rate automatically increases when the bond is in a 'call window'.
- The bond's duration increases as rates fall, making the price more sensitive to further moves.
- The investor has the right to force the issuer to pay a higher premium when rates are low.
- The price appreciation is capped because the issuer is likely to call the bond at a fixed price.
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