That question in the cfa book that I do not get it’s answer;
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I do not get the bolded statement, as far as I understand, when u call an option, you have an uncapped upside potential where you gain the difference between the market price-call price - the premium paid. For the putable option I do not get where is the upside potential in case the price increases, should not the option buyer losses??
When interest rates fall, bond prices rise.
For a callable bond, the issuer will call the bond if the rise hits their call… Therefore, the upside potential for a callable bond is capped
For a puttable bond, if interest rates go down, the price of the bond will rise and is uncapped because no one is going to call it since it doesnt have that feature.
For a straight bond, the movement of the bond is also uncapped.
“- For a puttable bond, if interest rates go down, the price of the bond will rise and is uncapped because no one is going to call it since it doesnt have that feature.”
Based upon your answer, this means that there is no upside potential, as the putable holder will not benefit anything.
No, if interest rates go down, the value of the putable bond will go up. Why do you think this would this mean they have no upside potential?
They also receiving coupons and have downside protection.
However, unless the YTM can go down to -100%, the upside is capped. If we assume that the lowest YTM possible is 0%, then the upside is capped at the sum of the (undiscounted) coupon and principal payments.