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Hard · Algorithms & Data Structures · Quant Trader interview question · fixed-income, callable-bond, negative-convexity
You are evaluating a 10-year callable bond with a coupon rate of 5% and a call provision that allows the issuer to redeem the bond at par after 5 years. Assume the current yield to maturity for similar non-callable bonds is also 5%. Why does this callable bond exhibit negative convexity when interest rates fall significantly?