Explain how an increase in expected interest-rate volatility can decrease the value of a callable bond.
Answer to relevant QuestionsAnswer the below questions. (a) What is meant by the option-adjusted spread? (b) What is the option-adjusted spread relative to? Under what conditions would the traditional yield spread be close to the static spread? Suppose you are told that the cash flow yield of a pass-through security is 9% and that you are seeking to invest in a security with a yield greater than 8.8%.Answer the below questions. (a) What additional information would ...Explain how the number of interest-rate paths used in the Monte Carlo simulation methodology is determined. In the calculation of effective duration and effective convexity, why is a prepayment model needed?
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