Interest rate effects on Bond's Duration

CFA Level II Fixed Income
#1

Hi,

Can someone explain simply how the rise and fall of interest rates affects the duration of bonds with embedded options?

Thanks

#2

I believe Straight bonds should have the longest duration, because there is no way they are repaid early.

For a straight bond, if interest rates fall, price rises. Now if that bond is callable, the bond will get called early, therefore it has a lower duration than the straight bond. For a putable bond, the reverse should occur.

#3

Thanks, ajb1.

I just went over the question I was struggling with after a much needed break, and it makes more sense now.