CFA Practice Question

There are 252 practice questions for this study session.

CFA Practice Question

If a comparable straight bond is yielding 4%, which yield does a callable bond tend to trade at?
A. 3%
B. 4%
C. 5%
Explanation: A callable bond tends to trade at lower prices (higher yields) of comparable straight bonds, as investors are not willing to pay full price since the embedded call creates uncertainty of the future cash flow from interest payments. This is why most bonds with embedded options often provide YTW (yield to worse) prices alongside their straight bond quoted prices, which reflect the YTM in the event a bond is called away by either party.

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