CFA Practice Question

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CFA Practice Question

A bond may include a provision that allows the issuer to retire or call all or part of the issue before the maturity date. From the investor's perspective, which of the following is (are) disadvantages to call provisions?

I. The cash flow pattern is not known with certainty because the bond may be called.
II. The investor is exposed to reinvestment risk as the issuer is likely to call the bonds when interest rates have dropped below the bond's coupon rate.
III. The price appreciation potential of the bond will be reduced relative to an option-free bond.
Correct Answer: I, II and III

User Contributed Comments 1

User Comment
jonan615 call option = negative convexity
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