CFA Practice Question
Negative convexity is possible for ______
A. callable bonds when the interest rates are low.
B. callable bonds when the interest rates are high.
C. putable bonds when the interest rates are high.
Explanation: The increase in price when the benchmark yield is reduced is less in absolute value than the decrease in price when the benchmark yield is raised.
User Contributed Comments 2
| User | Comment |
|---|---|
| lighty0770 | Am I thinking about this backwards? I assumed that high interest rates (relative to yield) would assume lower yields therefore higher price which is where negative convexity occurs for callable bonds. I would think that at lower interest rates you would have higher yield, indicating lower price which is positive convexity for a callable bond on the P/Y graph. |
| cminor | Callable bonds have negative convexity when its real close to in the money. Low interest rates mean the bond would likely be called (to get some cheaper debt) and therefore convexity is negative. There is a good graph that shows this in the readings. |