- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 42. Fixed-Income Securities: Defining Elements
- Subject 5. Bonds with Contingency Provisions
CFA Practice Question
If market interest rates rise, the price of a callable bond, compared to an otherwise identical option-free bond, will most likely decrease by ______.
A. less than the option-free bond
B. more than the option-free bond
C. the same amount as the option-free bond
Explanation: A callable bond's value is equal to an option-free bond less the value of the call option. As interest rates rise, the value of the call option decreases by a decreasing amount relative to the straight bond. The option-free bond also declines in value as interest rates rise, but this decrease is offset by the decline in the value of the call option. Therefore, the price of a callable bond decreases by less than a comparable option-free bond.
User Contributed Comments 1
| User | Comment |
|---|---|
| Lambo83 | Surely whether the movement in price is less or the same as an option-free bond is subject to where price is in relation to the call price. |