Callable bonds are more likely to be called when interest rates decline because the issuer can then refinance at a lower rate. The call price of a bond typically declines as time passes because the bond is closer to its maturity date, meaning there is less time for interest rates to change and make the bond more valuable to the issuer. Therefore, D is the best answer.

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Callable Bonds

Question 35

Multiple Choice

Callable bonds

A) are called when interest rates decline appreciably.
B) have a call price that declines as time passes.
C) are called when interest rates increase appreciably.
D) are more likely to be called when interest rates decline and have a call price that declines as time passes.

Correct Answer: