qbank #97988 (callable bonds)

which of the following is false? A.) the value of a callable bond equals the value of a vanilla bond + the option value. B.) the value of a callable bond is less than the value of a vanilla bond in an amount equal to the value of the call option. C.) when yields rise, the value of a callable bond may exhibit less of a price change than a vanilla bond. correct answer: A agreed, but this implies that C.) is TRUE. i don’t get that, it’s true for a _putable_ bond. at high yield levels the callable bond should behave the same as a vanilla bond, should it not? a callable bond exhibits less price sensitivity at small (not high) yield levels. can someone please clarify? cheers

You are correct !! Probably the option C isnt correct.

imo both a and c are false… a is definately false because the value of the callable bond is equal to the value of the vanilla bond _minus_ the option value c should also be false because of the reasons above

The question is poor, but A is clearly correct whereas C is conditionally correct. If the subject bond is trading at a massive discount, say 80-5, then price movements should be the same between callabales and non-callables when yields rise (or fall) and C will be false. But, assuming that the bond can be called at par and it’s trading very close to par, say 99-30, then when yields rise it will experience less price movement than a non-callable so C would be true.