Question: In Robert Litterman Jose Scheinkman and Laurence Weiss Volatility and

In Robert Litterman, Jose Scheinkman, and Laurence Weiss, “Volatility and the Yield Curve,”Journal of Fixed Income, (Premier Issue, 1991), p. 49, the following statement was made:
“Many fixed income securities (e.g., callable bonds) contain embedded options whose prices are sensitive to the level of volatility. Modeling the additional impact of volatility on the value of the coupons allows for a better understanding of the price behavior of these securities.”
Explain why.

  • CreatedAugust 22, 2015
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