Sch_Vol_2_Mock_3_PM_Q_115
hello, please anyone clear up the following for me.
the answer to this says "interest rates have a direct relationship with call option and an inverse relationship with put options"
Surely not!
Interest rates have an inverse relationship with call options (as when interest rates fall the bond issues is more likely to be called because refunding is more viable and the opposite being the case for when interest raise increase making refunding not equally attractive) and a direct relationship with put options (as when interest rates fall the bond itself increases in price as it offer better return and so the holder is unlikely to sell if for a lesser amount to the issuer whereas if interest increase the bond looses value as it offers less competitive returns and so it may well benefit the holder of the bond to put it and make a better price).
IF my reasoning is correct the right answer is B not C.
thanks for any contributions and please do point out errors in my thinking |