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Question of the Week - Fixed Income

AdaptPrepAdaptPrep Des Moines, IA, USAPosts: 211 Sr Associate
edited February 2015 in Level 1 Questions
The convexity on a callable bond tends to be negative when:

Question of the Week - Fixed Income 23 votes

The option is near or in the money
47%
LeChiffreAdaptPrepStuj79bhalb691roverfanclubVixentmcinernyarhelpabvanove12Richie321TheClaw 11 votes
The option is far out of the money
21%
nitinRandallK27thendry7rdxPicknroll 5 votes
Convexity is always positive
30%
Acesteingcompolongoryleibelandreacarzana71hamiltonmarianmihaiDrez07 7 votes

Comments

  • AdaptPrepAdaptPrep Des Moines, IA, USAPosts: 211 Sr Associate
    The option is near or in the money

    When the embedded call option is far out of the money, the value of the option is minimal and the callable bond behaves like a vanilla bond with positive convexity. As interest rates decline and the option gets closer to being in the money, convexity decreases and could even reach a point where it becomes negative.

    smdekhane
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