Hi, for the Q5 of the Spong Case from the mock exam, I don’t understand why the callables outperform bullets given the interest rises. It states that it is because of the low implied interest rate volatility.
If the implied interest rate volatility is low, so why the put option does not have lower value? In contrast, it becomes more valuable. Thanks.
Hi, would someone please clarify with me? Many thanks!
I vaguely recall this question. Don’t the puts outperform because the yield curve in the question is upward sloping which implies higher interest rates going forward (hence puts outperform)?
I could be wrong and am too lazy to look up the question
if interest rates rise , issuers will lose interest in calling back their loans . After all if they re-issued , they have to pay higher rates , and nobody wants that . As a result the vols on the callables drop and the embedded option in them loses value , which benefits investors in these loans . On the other hand bullets have no options in them and higher rates will lower their prices , causing them to underperform callables.
note: the callables also drop in price when rates go higher , but since callables have the call option which drops in price ( resulting in gains in value to the investor) their price drop is cushioned , and they outperform bullets.
where are two mock exams marc and PM? can someone please explain what are those multiples questions braken down by study section? there are not mock, are they?