The opportunity to exercise the quality option will occur when one deliverable bond becomes more favorably priced than another.

Question

Quizplus · Accepted Answer

This is true. The quality option allows the issuer to redeem a higher-coupon bond in favor of a lower-coupon bond when the lower-coupon bond becomes more favorable in the market. The decision to exercise this option is based on the relative prices of the two bonds.

The Opportunity to Exercise the Quality Option Will Occur When