CFA Practice Question

There are 252 practice questions for this study session.

CFA Practice Question

A straight bond is priced at $98.5. An embedded put option is priced at $4, given an interest rate volatility of 15%. If interest rate volatility goes up to be 20%, an otherwise identical bond but with such an embedded put option will MOST LIKELY be priced at:
A. $97.5
B. $102.5
C. $105.5
Explanation: The price of the putable bond will likely increase as the interest rate volatility goes up. With interest rate volatility of 15% the price is 98.5 + 4 = 102.5. The price has to be higher than 102.5 if the interest rate volatility becomes 20%.

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