CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

When interest rates are significantly higher than the coupon rate on a callable bond, the effective duration on that bond will be ______
A. only slightly lower than the duration of a non-callable bond.
B. higher than the duration of a non-callable bond.
C. equal to the duration of a non-callable bond.
Explanation: When interest rates are significantly higher than the coupon rate, there is little chance that the call option on the bond will be exercised. The effective duration on a coupon bond is only slightly decreased through an option adjustment, because the option is almost worthless.

User Contributed Comments 5

User Comment
danlan I think option is worthless in this case, so the duration should equal to the duration to maturity.
yly13 i thought so too, but then wouldn't you still pay more for a non-callable bond in this case
rickeling i guess the option still has time value slightly >0...
0000 The option always has value until it is expired because you can sell it.
treakj Think in this way: The Duration is the slope of the price x yield curve. Since the price of callable option is less than a free one, a slight difference in slope occurs, which in turns makes the duration of callable option less than a free one. This only happens when the yield is quite high.
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