In Robert Litterman, Jose Scheinkman, and Laurence Weiss, Volatility and the Yield Curve,Journal of Fixed Income, (Premier
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“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.”
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The probability of a bond being called is a function of the volatili...View the full answer
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