CFA CFA Level 1 Question of the Week – Fixed Income

Question of the Week – Fixed Income

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    • AdaptPrep
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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
    • AdaptPrep
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      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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