- 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 callable bond and a non-callable bond are very similar.
B. the effective duration of a callable bond becomes higher than that of a non-callable bond.
C. the effective duration of a callable bond becomes lower than that of a non-callable bond.
Explanation: The presence of an embedded call option reduces a bond's effective duration compared with that of an otherwise comparable non-callable bond. The reduction in the effective duration is greater when interest rates are low and the issuer is more likely to exercise the call option.
User Contributed Comments 2
| User | Comment |
|---|---|
| mmccoy | Soo.. the answer should be C? |
| myron | The answer is correct but the explanation is a bit not clear. When interest rate is high the effective durations are similar. Not much difference as the option does not play a big role in decision making. When interest rate is low, the issuer is more likely to call the bond so the effective duration is different. |