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The convexity on a callable bond tends to be negative when:
- The option is near or in the money
- The option is far out of the money
- Convexity is always positive
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Up2
When the embedded call option is far out of the money, the
value of the option is minimal and the callable bond behaves like a vanilla
bond with positive convexity. As interest rates decline and the option gets closer to being in the money,
convexity decreases and could even reach a point where it becomes negative.
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