Which of the following is correct concerning callable bonds?
A) There is an upper bound on the bond's price.
B) Their prices are higher than for straight bonds.
C) Their attraction to the issuer increases as interest rates increase.
D) The bond investor owns the call option.

Question

Quizplus · Accepted Answer

Callable bonds have an upper bound on their price because the issuer can call (redeem) the bond at a specified price (call price) on or after a specific date. This limits the potential price increase for the bond.

Answer: B is incorrect because callable bonds typically have lower prices than straight bonds due to the call option.

Answer: C is incorrect because an increase in interest rates would make it more likely for the issuer to call the bond and issue new bonds at a lower rate.

Answer: D is also incorrect because the call option belongs to the issuer, not the bond investor.

Which of the Following Is Correct Concerning Callable Bonds