A callable bond and an option-free bond have the same coupon, maturity and rating. The callable bond currently trades at par value. Which of the following lists correctly orders the values of the indicated items from lowest to highest? A) Embedded call, zero, callable bond, option-free bond. B) Zero, embedded call, callable bond, option-free bond. C) Zero, embedded call, option-free bond, callable bond. D) Embedded call, callable bond, zero, option-free bond.


B we’re not calling the embedded call a negative number though we subtract it, are we?


Oh, I was thinking that “Zero” meant a zero coupon bond… B But, one could say that the value of a short call to the bondholder is negative. Since the question doesn’t specify who’s perspective we are considering, I say B.

B for me…

A Embedded call is Option Free Bond - Callable Zero Coup will be less than the callable/option free If the Callable is at 100% the non callable will be higher.

No clue why Embedded Call is in the list as its not a bond. zero, callable , option free.


B for me?

Nib, pvt… i think there is some confusion about the zero being “0” or a zero coupon bond… would your answers change if it were “0”??

I will say “D” It’s says Callable bond is currently trading at par. So with call option, callable bond should be less than par price, right??


The correct answer per schweser is B. First of all, it’s ridiculous to put Embedded Call in the list of ZCB, OFB and CB’s. I mean why are we comparing apples to nedles? secondly, I don’t understand how a ZCB is cheaper than the Embedded call value?

i don’t think they mean a zero coupon bond- i think they mean zero. the number. zip, nada, zilch, ziperoo. point i guess is that even at par that call option probably has a little value at least of time value?

is it even customary to call a zero coupon bond as ‘zero’?. seeing so many folks confusing the zero in the question leads me to suspect so

They definitely have to be referring to zero as in “0”. If they meant “zero coupon bond”, then they would have to specify the time to maturity, otherwise you could not answer the question. The discount on the zero coupon bond is entirely dependent on the remaining time to maturity, so it could fit practically anywhere on this list.

Yeah zero here is the actual number 0.

Gotcha! Shame on them for playing with our emotions at such a fragile state of mind. They could have written ‘0’ instead of the complete ZERO which is pretty unusual.

then you would have read it as O (as in O.K.) and not “zero” the number…and you would’ve still complained…!