Why do Low Coupon Issues exhibit less NEGATIVE CONVEXITY than high coupon issues? That is, there will be greater price appreciation for low-coupon issues when rates decline.
Can some one give an example and explain, if it is not too much trouble?
do you care explain the theoretical part at least ? or is it again going to be another sarcastic remark as “you wish” ? , 
Because with low coupons you would have less reinvestment risk when interest rates decrease.
Lower coupon bonds have longer duration. Higher coupon bonds have shorter duration. As rates fall call risk increases. If a bond had lower coupons or lower YTM when issued it will have less call risk or less convexity. If coupons are already low than the risk of call is less than for a high coupon bond thus less convexity.
Is that question in CFAI curriculum?
That made sense CPK. I did make a lot of sense. I did not know about the “Lower coupon bonds have longer duration & Higher coupon bonds have shorter duration”. Is it there in any part of the curriculum reading ? I will read through further & find, but if you know it offhand, let me know @apr9th - Yes this is a part of the curriculum reading 24, End of chapter questions.
That is from the basic definition of Duration. If you look at duration as the time weighted recovery of cashflows - if you receive a lower coupon - the bond is “amortizing” (available) for a longer time - hence longer duration.
thank you CPK !
ok. i get the reinvestment part. its to do with interest rates. so is it interest rate risk? then from there link to duration?
The original question is incomplete. OP meant to ask why do low coupon CALLABLE bonds exhibit less negative convexity. All non-callable (bullet and puttable) bonds have positive convexity.
Negative convexity is when overall interest rates fall, price of the bond appreciates less due to the increased likelihood of the bond being called away by the issuer. All else equal, a callable with lower coupon is less affected by declining rates than a callable with higher coupon. This is because there is a limit to how much rates can fall, thus setting a limit to how likely the low-coupon will be called. Think of Person A paying a 8% 30yr mortgage and Person B paying 4%. If the refinance rate is 3.5% today and contines to decline, which person’s mortgage would lose value quicker, looking from the side of the lender (investor)?