Hello, I have problem with solving Q18 in Book 5 page 482. The answer in the book confuses me.<br/><br/>The question is:<br/>A bond that exhibits negative convexity at low yield levels (relative to the bond's coupon rate) and positive convexity at high yield levels (relative to the bond's coupon rate) is most likely a(n):<br/>A. putable bond.<br/>B. callable bond.<br/>C. option-free bond selling at a discount.<br/><br/>The answer is B. <br/>
The point of "relative to the bond's coupon rate" confuses me. Isn't bond's coupon rate fixed at any yield levels? Does "relative to the bond's coupon rate" means "relative to option-free bonds"? If yes, "positive convexity at high yield levels" implies a putable bond; while "negative convexity at low yield levels" implies a callable bond. Does anyone can help me from here?<br/>
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