CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

Use absolute value. When interest rates are high, ______
A. the effective durations of a putable bond and a non-putable bond are very similar.
B. the effective duration of a putable bond becomes higher than that of a non-putable bond.
C. the effective duration of a putable bond becomes lower than that of a non-putable bond.
Explanation: The presence of an embedded put option reduces a bond's effective duration compared with that of an otherwise comparable non-putable bond. The reduction in the effective duration is greater when interest rates are high and the investor is more likely to exercise the put option.

User Contributed Comments 2

User Comment
alexa821 "the reduction in effective duration is GREATER when IR are high" says the explanation. i assume this means that duration decreases with high IR because the bond holder will almost certainly exercise the put option. why should the B option be correct then if it on the contrary states that the duration will become higher? thanks!
alexa821 sorry I was all the time assuming option B is correct. my attention is severely damaged after 8 hours of study..
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