Correct Answer:
Trade 1 should be executed. Interest rates decline when the economy weakens. Due to negative convexity, callable bonds underperform non-callable bonds during periods of declining interest rates. Callable bonds have a price limit imposed by the call price. Consequently, the bond would most likely be called when rates decline. The trade will, therefore, be profitable.
Trade 2 should not be executed. Given Yung’s economic outlook and anticipation of a parallel downward shift in the yield curve, duration should be increased, not decreased. Fixed-rate bonds have higher duration than floating-rate bonds as coupons are fixed rather than adjusting periodically to market interest rates. Selling higher-duration bonds to invest in lower-duration bonds as rates decline would not be appropriate.
我的回答：
Trade 1
Profitable. Give there will be a downward parallel shift, callable bond will experience less upward price movement than non-callable bond. So buying non-callable bond and selling callable bond will likely be profitable.
Trade 2:
Not likely to be profitable. The increase rate will decrease, resulting in decreasing coupon payment. So replacing fixed rate bond by floating rate bond won't be profitable.
请帮忙判断一下我的回答是否能拿分？
因为我对照了标准答案，两个问题：
- 对于callable bond，是否一定要点出 Due to negative convexity以及likely to be called 这样的字眼？我的回答有回答到上涨的不如non callable bond是不是够了？
- 对于fixed换floating，标准答案中专门强调了“duration should be increased” 这个是我没想到的，这是一个必须要出现的关键词么？感觉这么一对比，我从coupon income下降并不是一个好的角度？
