CFA Practice Question

There are 252 practice questions for this study session.

CFA Practice Question

A straight bond is priced at $102.5. An embedded call option is priced at $4, given an interest rate volatility of 15%. If interest rate volatility goes up to be 20%, an otherwise identical bond but with such an embedded call option will MOST LIKELY be priced at:

A. $97.5
B. $98.5
C. $105.5
Correct Answer: A

The price of the callable bond will likely decrease as the interest rate volatility goes up. With interest rate volatility of 15% the price is 102.5 - 4 = 98.5. The price has to be lower than 98.5 if the interest rate volatility becomes 20%.

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