[Verse 1] When bonds have choices hidden inside Callable, putable, they can't hide Traditional duration starts to break Price sensitivity's at stake Convexity curves in twisted ways As interest rates shift through their maze [Chorus] Effective duration cuts through the fog When embedded options play dialogue Bump the rates up, bump them down See how prices move around Effective duration shows the truth When standard measures need more proof [Verse 2] Callable bonds cap upside gain When rates fall down like summer rain The issuer calls at a certain price Duration shortens in a slice Putable bonds provide a floor When rates climb high, they offer more [Chorus] Effective duration cuts through the fog When embedded options play dialogue Bump the rates up, bump them down See how prices move around Effective duration shows the truth When standard measures need more proof [Bridge] Take the yield, shift it by ten Calculate price, then shift again Negative shock and positive too Price changes tell you what to do Divide by twenty, times the price Effective duration's roll of dice [Verse 3] Mortgage securities twist and turn Duration drift you need to learn As homeowners refinance their debt The patterns that you thought were set Transform like clay in sculptor's hands Effective duration understands [Chorus] Effective duration cuts through the fog When embedded options play dialogue Bump the rates up, bump them down See how prices move around Effective duration shows the truth When standard measures need more proof [Outro] When options lurk beneath the surface Effective duration serves its purpose Complex bonds require complex tools Don't get caught by simple rules
← Convexity Adjustment and Calculations | Negative Convexity in Callable Bonds →