Interest Rate Sensitivity of Callable Bonds and Higher-Order Approximations

• Published in: Risks (Basel) Vol. 13; no. 4; p. 69
• Main Authors: Dow, Scott S., Orfanos, Stefanos C.
• Format: Journal Article
• Language: English
• Published: Basel MDPI AG 01.04.2025
• Subjects: Approximation; Arbitrage; bond agility; Bond issues; bond tilt; Federal Reserve monetary policy; Fixed income securities; higher-order approximations; Interest rates; Investment analysis; Mortgage backed securities; Municipal bonds; negative convexity bonds; Portfolio management; Prices and rates; Put & call options; Valuation; Volatility; Yield curve

Certain fixed-income securities, such as callable bonds and mortgage-backed securities subject to prepayment, typically exhibit negative convexity at low yields and cannot be adequately immunized through duration and convexity-matching alone. To address this residual risk, we examine the concepts of...