CFA Practice Question

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CFA Practice Question

A company has a callable issue outstanding. If the volatility of interest rates increases, all of the following statements are true EXCEPT
A. the probability of call increases.
B. the value of the callable bond increases.
C. bond investors may lose the difference between the intrinsic value of the bond and its call price.
Explanation: Value of a callable bond = Value of equivalent straight bond - Call option

Option value increases when interest rate volatility increases. Since investors have written a call option, when the option value is subtracted, the value of a callable bond decreases.

User Contributed Comments 4

User Comment
push its a misprint answer is B

Call option increases ----> that means value declines
wollogo Question asks which is incorrect - B is a correct statement.
surob The answer is right. Read the word except
mali97 answer is correct dummies
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