A callable bond should be priced the same as
A)a convertible bond.
B)a straight bond plus a put option.
C)a straight bond plus a call option.
D)a straight bond plus warrants.

Question

Quizplus · Accepted Answer

A callable bond is a straight bond with a call option that allows the issuer to redeem the bond before maturity. Therefore, the pricing of a callable bond should be similar to a straight bond plus a call option. Choice A is incorrect because a convertible bond has a conversion option, not a call option, and the pricing for a convertible bond is different. Choice B is incorrect because a put option is not relevant to a callable bond since the issuer has the option to call, not the holder. Choice D is incorrect because warrants are not relevant to a callable bond.

A Callable Bond Should Be Priced the Same as