- CFA Exams
- CFA Level I Exam
- Study Session 15. Fixed Income (2)
- Reading 46. Understanding Fixed-Income Risk and Return
- Subject 3. Properties of Bond Duration
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.. |