From the course: Applied Fixed Income

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Introduction to callables and putables

Introduction to callables and putables

From the course: Applied Fixed Income

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Introduction to callables and putables

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- [Presenter] The topic of the next module are callable and putables. For most fixed income investors, they are most concerned with maximizing their investment return or how to get additional yield. Well, the answer is really quite simple. There are three ways of getting this additional yield. The first ways extend duration. In a normal yield environment, investors should get compensated for taking on longer term risk. The second way is to go down the credit curve or credit stack. Again, in a normal yield environment, the risk versus reward relationship means that if a rational investor takes on more credit risk, they should be compensated with greater returns. The third way is to sell optionality. By including optionality via embedded derivatives, a bond investor should expect to get additional yield over a straight bond. That is a bond without any embedded derivatives. The structure of the optionality may be simple, which we call vanilla options, or they may be more complicated…

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