CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to the price behavior of putable bonds?

I. At very high levels of interest rates, the price of a putable bond will be very close to that of an equivalent non-putable bond.
II. At very low levels of interest rates, the put embedded in the bond will have a very low value.
III. Negative convexity will begin to appear for a putable bond at very low yield levels.
IV. At high yield levels, duration will underestimate the expected bond price for a given unit change in yield.
A. I, II, and III
B. II and IV
C. II, III, and IV
Explanation: I is incorrect because at very high levels of interest rates, the bondholders will want to exercise their right to deliver the bond back to the issuer. Thus, the value of a putable bond will be considerably higher than that of an equivalent non-putable bond.

III is incorrect because the convexity for a putable bond will be positive at all yield levels.

User Contributed Comments 1

User Comment
Beret IV. At high yield levels, duration will underestimate the expected "bond price" for a given unit change in yield.

If they had said "bond price change" IV would have been false.
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