# Callable Bond Q bank question

Can someone explain how to know the values? I will put up the answer in a couple hours. Thanks! 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) Zero, embedded call, callable bond, option-free bond. B) Embedded call, callable bond, zero, option-free bond. C) Embedded call, zero, callable bond, option-free bond.

A) Zero, embedded call, callable bond, option-free bond

i’m going with c

A Unless there’s some stupid trick about the call having -ve value to the bondholder, then its C.

The correct answer was A) Zero, embedded call, callable bond, option-free bond. The embedded call will always have a positive value prior to expiration, and this is especially true if the callable bond trades at par value. Since investors must be compensated for the call feature, the value of the option-free bond must exceed that of a callable bond with the same coupon and maturity and rating. I don’t understand the order of zero and embedded call bonds. can you guys please explain more?

i dont know if I interpret too much into this but zero = 0 or zero = zero coupon bond…

oh yeah, zero = 0…i was wrong. i thought zero = zero coupon bond

same mistake over here…

level2frmLA Wrote: ------------------------------------------------------- > The correct answer was A) Zero, embedded call, > callable bond, option-free bond. > > The embedded call will always have a positive > value prior to expiration, and this is especially > true if the callable bond trades at par value. > Since investors must be compensated for the call > feature, the value of the option-free bond must > exceed that of a callable bond with the same > coupon and maturity and rating. > > I don’t understand the order of zero and embedded > call bonds. can you guys please explain more? from my understanding, zero coupon bonds are called “zeros” and will be discounted at face value at issuance. the callable bond is more than par.

this is such an asshat question. apparently zero means \$0, not a zero coupon bond. http://www.analystforum.com/phorums/read.php?12,710758,710968#msg-710968

Value of Call Option (V-opt) = Value of Option free bond - Value of Callable bond. For a callable bond,…V -opt is always positive (atleast from issuers perspective) otherwise the bond has no optionality embedded. This implies the V-opt > 0.

what the hell is this question asking? CFAI does a much better job vetting questions, so you wont see this type of garbage come test day. “values of the indicated items”? this question is about as clear as mud