Also depends upon whether you look at the embedded call having -ve value to the investor, in which case A would be right.
chrismaths, is that not the case. meaning that the call has negative value to investor, especially when you consider option free has higher price then callable bond.
brother dinesh, you’re the smartest guy on this board, and i’m glad that i’m finally able to answer a question for you my friend. i would choose A. the callable bond will *always* be less than an option free bond - all things equal. a puttable bond is the opposite - it trades higher than an option-free bond. for a call bond, you, the investor, has SOLD the call, so this bond costs less. the issuer can buy it back from you any time they want (i.e. when rates go down). so, we know that the callable < option-free bond. the embedded call is just a few dollars, right? a zero trades at a deep discount - not just a small discount when compared to a callable bond. therefore, call option < zero < callable bond < option-free bond.
I still don’t think they are referring to zero as a zero coupon bond, but rather “0”
this question is unfair! they should have written out $0.00 for the zero. the option is from the investor’s perspective. he received a few dollars for this. $0.00 < call option < callable bond < option free bond. this was very unfair. i hope the exam isn’t this unfair.
^ Reading the Schweser responses from the 2006 exam questions (beginning of book 7), it seems like there were a lot of unfair questions on that exam. Hopefully not this year.