Duration at high yield on callable bonds

[JoeyDVivre]

That sentence is true (and add in the stuff about same coupon, covenants, liquidity, not in default, etc) because of the reason you gave above - the option may be so close to worthless that the price of the bond is unaffected by that option.

Of course the problem with this is that never in the history of mankind have there been two bonds that were exectly equivalent except that one was callable and the other wasn't.



Edited 1 time(s). Last edit at Sunday, April 15, 2007 at 08:57PM by JoeyDVivre.

 

[plyon]

JoeyDVivre Wrote:
-------------------------------------------------------
>
> Of course the problem with this is that never in
> the history of mankind have there been two bonds
> that were exectly equivalent except that one was
> callable and the other wasn't.

Hmmm... My Bloomberg is upgrading itself right now, otherwise I don't think it would take me too long wrong to prove otherwise. Remember, the largest callable bond market in the world is the US Agency debt market, so first of all you can basically take any issuer or credit differences right out of the equation.

Easiest thing to do would be to simply to go into FHLB tomorrow on reverse inquiry and have them print 100mm of each (one bullet, one callable) for my funds! But that would be cheating. (As well as a violation of the Stds of Practice unless I had a sound basis for the investments!).

 

[JoeyDVivre]

plyon Wrote:
-------------------------------------------------------
> JoeyDVivre Wrote:
> --------------------------------------------------
> -----
> >
> > Of course the problem with this is that never
> in
> > the history of mankind have there been two
> bonds
> > that were exectly equivalent except that one
> was
> > callable and the other wasn't.
>
> Hmmm... My Bloomberg is upgrading itself right
> now, otherwise I don't think it would take me too
> long wrong to prove otherwise. Remember, the
> largest callable bond market in the world is the
> US Agency debt market, so first of all you can
> basically take any issuer or credit differences
> right out of the equation.
>
> Easiest thing to do would be to simply to go into
> FHLB tomorrow on reverse inquiry and have them
> print 100mm of each (one bullet, one callable) for
> my funds! But that would be cheating. (As well
> as a violation of the Stds of Practice unless I
> had a sound basis for the investments!).

Point taken.

 

[Char-Lee]

�D) When yields rise, the value of a callable bond may exhibit less of a price change than a noncallable bond.�

I read the first few posts on this forum got bored once Joey left his first 500 word dissertation. So forgive me if this point was already mentioned... but sometimes the short and simple answers have the most value.

Choice (D) didn't even stand out as unusual because it's clearly true�. Here�s why

When thinking of the overlay curves (option free and callable prices vs yields) at the points below y' changes in the callable price will be less then the callable equivalent. Consider that the curve of the callable bond asymptotically approaches the call value as yields decline (with negatively convexity), the slope at any point is lower then its option free equivalent. Move along that curve (in either direction) just a little and it can be seen that changes in price are less for the callable bond then the option free. So clearly D) can be true.

 

[mwvt9]

Char-Lee,

We mentioned this later in the post. When I first posted the question I didn't read the word "MAY" in answer D. I thought it was saying it always exhibited less price change than a non-callable bond (which is why I thought it was false).

Once we cleared that up, we moved on to whether the callable and noncallable bonds have the same price-yield function when yield moves from y* to a higher yield.

Thanks for the input.

 

[nolabird032]

btw mwvt... fun question! nothing like a good debate to cement this topic into my brain.

 

[Char-Lee]

mwvt... sorry to repost, i assumed it was covered already seeing that the people participating in the forum tend to be pretty knowledgeable... hence my disclaimer.

The devil is in the details, and recognizing "MAY" is good practice on your part. I try to do the same when reading these types of questions.

 

[JoeyDVivre]

Hey Char-Lee -
I donate my time, my charter, my Ph.D., my years teaching this stuff in exclusive colleges and universities, my years of experience in finanacial markets since you were in diapers, and I don't appreciate the comments. You need to grow up pal.

 

[Char-Lee]

I obviously struck a nerve; but perhaps now you might have an idea how others feel with some of your responses to their questions and your overall poor delivery. So relax, my little jab pails in comparison to some of your tirades.

There is no doubt that you are a valuable resource on these forums (all levels); but with that said is it too much to ask for you to exercise a little humility? Or is your ego going to prevent that?

Everyone here knows you're smart.



Edited 1 time(s). Last edit at Monday, April 16, 2007 at 11:43AM by Char-Lee.

 

[nolabird032]

charlee... take this somewhere else. some of us are here to learn and honestly, i'm glad people like joey come around the L1 forum to help us out. if you dont understand his posts then thats your own problem... all i do is ask for some clarification. luckily he's happy to help me understand. i think the issue is your pride, not joeys ego.



Edited 2 time(s). Last edit at Monday, April 16, 2007 at 11:58AM by nolabird032.

 

[oversun]

A is a right answer.
The value of a callable bond equals the value of the bond without the option less the option value.


For D,

I think when you refer to the figure 3 on page 114 on schweser book 5, you will find the answer directly. However, if you want to think the question in the duration and convexity way, it will be far more complex. Because, when the yield below y', callable bond and non-callable have different duration and convexity coefficient.