Does a callable bond exhibit negative or positive convexity?
Answer to relevant QuestionsSuppose that you are given the following information about two callable bonds that can be called immediately: You are told that both of these bonds have the same maturity and that the coupon rate of one bond is 7% and of the ...Explain how, given the cash flow on the simulated interest-rate paths, the average life of a RMBS is determined. Explain why you agree or disagree with the following statement: “When the Monte Carlo simulation methodology is used to value a RMBS, a PSA assumption is employed for all interest-rate paths.” In the calculation of effective duration and effective convexity, why is a prepayment model needed? Suppose that the price of the underlying stock for aconvertible bond is considerably higher than theconversion price. What would expect that convertiblebond’s delta to be?
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