How much does negative convexity cost investors in a falling rate environment?

The cost of negative convexity equals the OAS pickup of callable vs. non-callable bonds, which represents option premium compensation. In sharp rate rallies, callable bonds underperform by 2–3 points versus non-callable equivalents of similar modified duration as the call option gets exercised.

What is an investor's primary remedy for negative convexity?

Investors accepting negative convexity are compensated through higher OAS. Active investors can buy callable bonds and purchase swaptions or interest rate caps to partially replicate the non-callable structure. Alternatively, buying non-callable equivalents (e.g., agency debentures vs. MBS) avoids the issue entirely.

Callable Bond Negative Convexity Impact

Analyze negative convexity in callable bonds: as yields fall below the coupon rate, the embedded call option limits price appreciation, creating a price ceiling and reducing investor returns relative to non-callable equivalents.

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$ Finance Disclaimer: These calculators are for educational and illustrative purposes only. Results do not constitute financial advice. Consult a licensed financial advisor before making investment or borrowing decisions.

How to Use

Enter the values for the scenario you are assessing. Analyze negative convexity in callable bonds: as yields fall below the coupon rate, the embedded call option limits price appreciation, creating a price ceiling and reducing investor returns relative to non-callable equivalents. Use the callable bond convexity result to inform your calculation.

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