CFA Practice Question

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CFA Practice Question

Which of the following statements is the LEAST ACCURATE with respect to the price volatility characteristics for putable bonds?

A. The yield on a non-putable bond can never become higher than the yield on an equivalent non-putable bond.
B. At yield levels above that of the coupon rate, putable bonds become extremely sensitive to small changes in yield.
C. The price of a putable bond can never become lower than the price of an equivalent non-putable bond.
D. For low levels of yield, the price volatility characteristics of a putable bond will mirror those of an equivalent non-putable bond.
Correct Answer: B

At yield levels above that of the coupon rate, the putable bond will trade very close to its putable price, as the investor would rather choose to put the bond back to the issuer than see it trade at a discount. Thus, at those yield levels, the putable bond price will be unresponsive to changes in yields.

User Contributed Comments 5

User Comment
steved333 why would a putable bond be cheaper than its non-putable counterpart???
steved333 oh I see. LEAST accurate...
Richie188 exercise price for a putable bond is normally the par value. as the yield goes above the coupon rate, the price of the putable bond gets very close to the exercise price and becomes insensitive to further yield changes.
jpducros see next chapter
johntan1979 Picturing the graph will help eliminate C and D instantly, and A is to test our intelligence.

Non-putable vs non-putable... nice try
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