In a rising interest rate environment, the difference in effective duration between a callable bond and a non-callable bond would most likely:
- increase.
- decrease.
- remain unchanged
We have learned that as interest rates rise the price of a bond falls for both callable and non callable bond.
So accordingly the effective duration should remain unchanged ?
If anyone can explain this question’s answer through audio, it would be helpful.
Thanks
difference will decrease
As rates rise the call option is least likely to be excecuted so the difference in ED Between a callable and non callable nond will decrease
According to my understanding when interest rates are high the effective duration between callable and non callable bond is negligible or unchanged. I hope the image helps in better understanding. Correct me if wrong.