Call option derivative

Siegel, Inc., has issued bonds maturing in 15 years but callable at any time after the first 8 years. The bonds have a coupon rate of 6%, and are currently trading at $992 per $1,000 par value. If interest rates decline over the next few years:

  1. the call option embedded in the bonds will increase in value, but the price of the bond will decrease.

  2. the price of the bond will increase, but likely by less than a comparable bond with no embedded option.

  3. the price of the bond will increase, primarily as a result of the increasing value of the call option.

Answer says 2
But a callable bond is advantageous to the issuer so it will be issued at high interest rates and LOWER PRICES, right? So how will bond price increase

The market interest rate declined the issued bonds price will increase regardless of callable or non-callable bonds.

Got it! Thank you so much