Answer: A callable bond

## Explanation **Callable bonds** are most likely to exhibit **negative convexity** because: - **Callable bonds**: When interest rates fall, the bond's price appreciation is limited because the issuer can call the bond at a predetermined price - **Negative convexity**: The bond's price increases at a decreasing rate as yields fall (the price-yield curve bends downward) - **Putable bonds**: Exhibit positive convexity because the put option gives the bondholder the right to sell the bond back to the issuer when rates rise - **Option-free bonds**: Always exhibit positive convexity Negative convexity occurs when the bond's duration decreases as yields fall, which happens with callable bonds as the call option becomes more valuable to the issuer.

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