'The implied volatility shouldbe the same for both puts and calls, all factors constant Yet there has been a divergence in implied volatility between callabales and putables (volatility for putables structures was muchlower than for callables). This suggest that a typical put bond shold trade at a lower yield in the maket than is commonly thecase.
I have not understood as to why put bonds trade at a lower yield.
Hey, puttable bonds have an option that is a benefit to the investor, as they are able to put the bond to the issuer if they like. This benefit will come at higher bond prices, and subsequently lower yields.
The option in callable bonds is valuable to the issuer (and therefore takes away from the value to the shareholder, as he/she can have the investment called away). So, the callable bond will trade at a relative discount to the non-callable and therefore offer a higher yield.
When they say that the implied volatility is lower, what they’re really saying is that the market price of the option is lower. So here, they’re saying that the market price of the puts embedded in putable bonds is lower than than it should be based on the market price of comparable calls embedded in callable bonds. In short, these options violate put-call parity. (Note: there’s probably no easy way to set up an arbitrage transaction to take advantage of this mispricing; if there were, someone would have already done it.)
Call - low interest rate environment - benefits issuer - price potential exists for investor and favorable interest rate for issuer
Put - high interest rate environment - benefits investor - investor puts and claim the put strike price where credit risk lies with the issuers who is currently facing high interest rate environment - so a credit risk in noised in - reducing the effect of the put.
Therefore the put option does not work as smoothly as the call. So though the put price has to be higher than a regular bond…it still trades closer to a regular one…