Put structures

CFA Level III Fixed Income
#1

Finquiz Mock exam 3 PM Q 42

Statement: (part of the vignette)

Conclusion 2: During interest rate rallies, both call and put structures outperform bullet structures

Answer chosen: Incorrect, put structures are preferred when there is a bearish outlook for interest rates

Reason: because put structures are preferred by investors when the outlook for interest rates is decidedly bearish.

My view: Put structures are preferred when the interest rates are rising.

The response in the mock exam seems to be incorrect.

Kindly clarify

#2

IMO putable bonds are preferred in both declining and rising interest rate environment.

When rates decline, callable bonds exhibit negative convexity (ie ceiling equal to call price), putable bonds don’t - thus are preferred.

When rates rise, putable bonds prices fall less becase of put option.

#3

kobi, thank you, then

Reason: because put structures are preferred by investors when the outlook for interest rates is decidedly bearish.

should have been 'Reason: because put structures are preferred by investors when the outlook for interest rates is decidedly bullish***.

Confirm.

thank you

#4

interest rate rising is a bear environment, falling is a bull environment. because when rates rise - bond prices fall - which is bearish.

#5

I believe both puttable and callable are preferred in bearish markets not only puttables …

This is getting misleading…

So when interest rates are falling, call underperform because of their negative convexity nature and puts perform better but is the latter’s performance better than bullets? I believe bullets outperform in lower interest rates but now im confused.

#6

Both putables and callables outperform bullets in rising interes environment (ie. have samller losses) and bullets outperform both putables and callables in declining interest rate environment (have larger gains)

Look here for a nice example by magician: http://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91330555

#7

amazing which confirms what i said about both outperforming bullets in bearish markets (ie interest rates rising).