If interest rates fall, the investor will not exercise the option in a put bond.

Question

Quizplus · Accepted Answer

In a put bond, the investor has the option to sell the bond back to the issuer at a predetermined price before maturity. If interest rates fall, bond prices rise, making the bond more valuable on the market than the price at which the investor can sell it back to the issuer. Therefore, the investor is less likely to exercise the put option.

If Interest Rates Fall, the Investor Will Not Exercise the Option