medium · Debt Capital Markets pricing-yields-curve
Why does a callable bond exhibit 'negative convexity' as interest rates fall toward the call price?
- Because the issuer is contractually forced to pay a higher coupon as market rates decline, compensating holders for bearing the embedded call risk.
- Because the effective duration of the bond shortens sharply as the issuer's embedded call option moves further out of the money.
- Because steadily falling rates reduce the issuer's probability of default, which then paradoxically erodes the recovery-adjusted market value of the outstanding bond.
- Because the bond's price appreciation is capped near the call price, as the market anticipates the issuer will redeem the bond to refinance at lower rates.
Sign up free to see the explanation and track your rank →
More Debt Capital Markets pricing-yields-curve practice
- For a bond trading at a discount (below par), which yield measure is typically the same as
- If a bond's Yield to Worst is equal to its Yield to Maturity, what can we likely conclude
- If an issuer decides *not* to call a bond on the first call date even though it is economi
- If a bond's YTW is significantly lower than its YTM, the bond is likely trading at a:
- For a bond with several call dates at different prices, the Yield to Worst is:
- The concept of 'Pull to Par' describes the price convergence… — Which yield measure inhere
- If an investor buys a bond with a 5% coupon at a price of 102, how does the Yield to Matur
- A bond's yield to maturity (YTM) is 7%, but its current yiel… — What does this suggest abo