Given the three bonds below, which bond should have the most interest rate risk? 2 A B Maturity Coupon Yield 5y 3.40% 1.50% 5y 2.40% 1.50% 5y 1.50% 1.50% O Asset A Asset B O Asset C QUESTIONS Why do callable bonds have negative convexity? As rates decline, callable bonds are more likely to be called and therefore their maturities (duration) shortens. As rates increase, yields decline O Callable bonds are less attractive to investors in rising rate environments O Callable bonds carry higher yields than option free bonds