Please help me in Ques no 141
With Explanation.
Siddharth PuriIntermediate
Understanding fixed Income risk & return
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When the interest rates rise, the value of the Put option will increase and then it will approach the Put price, after which point fewer conversions will occur and hence the value of Put option rises at decreasing rate.
can u please elaborate it. I mean the effect of high interest rate on the put option and the value of putable bond.
Hi,
To elaborate upon the above given answer, as the interest rate risk rises, there is more chance that the put option in puttable bond will get exercised since the put holders will think that they can sell this and invest in another bond where they can get higher interest rate, therefore the value of put increases. But as there is floor i.e. put price as sir showed us in the diagram, the price cannot go below the put price, therefore value increases but at a decreasing rate.
Hope this helps!