# Q. callable bond price decrease vs. optional free bond.

V5- 97 If market interest rates rise, the price of a callable bond, compared to an otherwise identical option-free bond, will most likely: Select exactly 1 answer(s) from the following: A. increase by less than the option-free bond. B. decrease by less than the option-free bond. C. decrease by more than the option-free bond. D. decrease by the same amount as the option-free bond. ----------------------------------------------------------- my guess: D "when the call date is far away, D is right. When call date is close, and the rate is very low, B is right. I think this Q is not accurate enough. Depends on the call feature and how much the call is in/out of the money. Value of callable is value noncallable minus value of a call option, so if call value changes when yield changes (which is does), change in price of callable cannot be the same as price change of non callable. Please see Price-Yield function of callable vs. option-free bond. (Figure 2 on P. 141 of schweser Book 5) and note that shape of price yield relation for callable and option-free are quite different.

B think graphs!!!

D should be the best answer

C. As they the callable bond will have positive convexity.

Interest rates rise, bond with an option acts like an option free bond.

ooooppps. I am wrong. I think correct answer is D.

pepp Wrote: ------------------------------------------------------- > ooooppps. I am wrong. I think correct answer is D. why?

If interest rate rise, the price of the bond will go down, and hence there is high probability that the issuer will call the bond.

umm… god, i think i knew how to answer this… nowi am getting all confused.

image the graph of bond price and yield, I think it is B, callable bond decrease always than option free bond. the call option always has some value.

It is C. Because of the positive convexity, the price will decrease by more the option free bond.

strangedays Wrote: ------------------------------------------------------- > If interest rate rise, the price of the bond will > go down, and hence there is high probability that > the issuer will call the bond. what are you talking about???

also image the graph of putable bond vs. option free bond. when interest raise, putable bond decrease less too.