- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 28. Valuation and Analysis of Bonds with Embedded Options
- Subject 3. Valuation of Default-Free Callable and Putable Bonds
CFA Practice Question
If the level of the interest rates goes down, which value(s) will rise?
II. The value of a call option.
III. The value of a put option.
I. The value of a callable bond.
II. The value of a call option.
III. The value of a put option.
Correct Answer: I and II
The value of a put option will drop.
User Contributed Comments 4
| User | Comment |
|---|---|
| Rva100 | If the value of a call option rises, wouldn't the value of a callable bond decrease? |
| davidt876 | i'm with you Rva. the question's wrong: value of callable bond = value of straight bond - value of call option also who wants to pay more for a callable bond when rates are falling and it's ever more likely that the issuer will call the bodn and refinance at lower rates?? but tbh i like all the errors, keeps u on ur toes |
| michaelcfa | The question is correct. Interest rates affect BOTH the value of the bond and the value of the option. When they go down, the value of a bond will increase (bigger impact), and the value of a call option will increase too (smaller impact). The value of a callable bond will increase. |
| davidt87 | yeeeaaa i see that now |