assuming no change in the credit risk of a bond, the presence of an embedded put option:
A) reduces the effective duration of the bond.
B) increases the effective duration of the bond.
C) does not change the effective duration of the bond.

Question

Quizplus · Accepted Answer

The presence of an embedded put option provides the bondholder with the right to sell the bond back to the issuer at a pre-determined price. This feature effectively limits the potential downside risk of the bondholder. As a result, the price of the bond will be less sensitive to changes in interest rates, which decreases the effective duration of the bond.

Assuming No Change in the Credit Risk of a Bond