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Answer: Puttable bonds have lower VaR than callable bonds
Puttable bonds give the investor the right to sell the bond back to the issuer, creating a long put option position. This positive gamma (convexity) reduces VaR because the bond's price has a floor when interest rates rise. Callable bonds have negative gamma (the issuer can call the bond when rates fall), increasing VaR.
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With a puttable feature, the investor is long an option, because he or she can "put" back the bond to the issuer. This will create positive gamma, or lower VaR than otherwise.
A
Puttable bonds have higher VaR than callable bonds
B
Puttable bonds have lower VaR than callable bonds
C
Puttable and callable bonds have the same VaR
D
VaR cannot be calculated for bonds with embedded options
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