Price compression(redirected from Price Compressions)
The limitation of the price appreciation potential for a callable bond in a declining interest rate environment, based on the expectation that the bond will be redeemed at the call price.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
The downward pressure on a callable bond's price appreciation during a period of declining interest rates. Declining interest rates normally raise a bond's price because interest rates are usually fixed at issue; buying such a bond will entitle the buyer to a higher interest rate than he/she would otherwise be able to receive when rates are declining. Callable bonds also rise in price, but price compression means that they do not rise as much because of the risk that the issuer will call the bond and simply repay the principal, depriving the bondholder of future interest.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved