Hey guys,
Quick question, in the context of “callable bonds deep out of money (low coupon rate) will have the highest key rate duration at their maturity” and “putable bonds deep out of money (high coupon rate) will have the highest key rate duration at their maturity”…how does that high and low coupon rate play into this?
relating to LOS 44.
Thanks in advance, A
When the option is deep out of the money the bond acts like a straight bond with its original maturity.
The more the option is in the money, the more the bond acts like a bond whose maturity is the next exercise date.
Agreed, but that still doesnt explain why the rate of coupon would affect this.
I agree the lower the coupon the lower the sensitivity to KRD points before the Mat, as the bond is effectivly acting like bullet / zero coupon one - but then why would it need to be high coupon for deep out of money puttable?