How Is It That Negative Convexity Is Present on a Callable

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The Answer is Callable bonds allow the issuer to call back the security by paying face value to the owner of the bond. When interest rates fall the value of the bond normally increase, yet in this case there is a diﬀerence. When interest rates fall and make the value of the bond higher than face value the issuer will prefer to call it back and pay face value. This means that as interest rates fall, the value of the bond converges to face value.

How Is It That Negative Convexity Is Present on a Callable

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