Erna Smith, a portfolio manager, has two fixed-rate bonds in her portfolio: a callable bond (Bond X)

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Erna Smith, a portfolio manager, has two fixed-rate bonds in her portfolio: a callable bond (Bond X) and a putable bond (Bond Y). She wants to examine the interest rate sensitivity of these two bonds to a parallel shift in the benchmark yield curve. Assuming an interest rate volatility of 10%, her valuation software shows how the prices of these bonds change for 30 bps shifts up or down:Time to maturity Coupon Type of bond Current price (% of par) Price (% of par) when shifting the benchmarkWhich of the following statements is most accurate?

A. Bond Y exhibits negative convexity.

B. For a given decline in interest rate, Bond X has less upside potential than  Bond Y.

C. The underlying option-free (straight) bond corresponding to Bond Y exhibits negative convexity.

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Fixed Income Analysis

ISBN: 9781119850540

5th Edition

Authors: Barbara S. Petitt

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