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 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.
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