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.