Which of the following statements about embedded call options is most accurate? A) The call price acts as a floor on the value of a callable bond. B) The value of a callable bond is equal to the value of the straight bond component plus the value of the embedded call option. C) The value of a callable bond will always be equal to or greater than an otherwise identical non-callable bond. D) When yields rise, the value of a callable bond may not fall as much as a similar, straight bond.
Option D ?
The value of a callable bond is equal to the value of the straight bond component minus the value of the embedded call option. The value of a callable bond will always be equal to or less than an otherwise identical non-callable bond. the answer is D, but I don’t understand why the callable bond doest not fall as much as a straight bond.
E) None of the Above Is it E? A) The call price acts as a CEILING on the value of a callable bond. B) The value of a callable bond is equal to the value of the straight bond component MINUE the value of the embedded call option. C) The value of a callable bond will always be equal to or LESS than an otherwise identical non-callable bond. D) callable bonds and option free bonds are indifferent at high yields - Dinesh S
Your answer: A was incorrect. The correct answer was D) When yields rise, the value of a callable bond may not fall as much as a similar, straight bond. The value of a callable bond is equal to the value of the straight bond component minus the value of the embedded call option. Remember, the call option benefits the issuer, not the investor. The call price acts as a ceiling on the value of a callable bond. The value of a callable bond will always be equal to or less than an otherwise identical non-callable bond. **this is straight from schweser
yup I agree. It is almost equal to the otherwise identical non callable bond. It is either slightly less or equal to the value of the otherwise identical non callable bond
It is a little ackward question it’s based on the fact that value of callable bond= value of bond- value of call option when the yields rise value of bond decreases but value of call option decreases too therefore the change in price is less than that of the non callable bond
i will go for d) as well