Callable Bond Convexity - Quant Trader Interview Question
Difficulty: Hard
Category: Algorithms & Data Structures
Practice quant interview questions from top firms including Jane Street, Citadel, Two Sigma, DE Shaw, and other leading quantitative finance companies.
Topics: fixed-income, callable-bond, negative-convexity
Problem Description
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?
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