which of the following is false?
A.) the value of a callable bond equals the value of a vanilla bond + the option value.
B.) the value of a callable bond is less than the value of a vanilla bond in an amount equal to the value of the call option.
C.) when yields rise, the value of a callable bond may exhibit less of a price change than a vanilla bond.
correct answer: A
agreed, but this implies that C.) is TRUE. i don’t get that, it’s true for a _putable_ bond. at high yield levels the callable bond should behave the same as a vanilla bond, should it not? a callable bond exhibits less price sensitivity at small (not high) yield levels.
can someone please clarify?
cheers作者: YouCanDoIt 时间: 2013-4-4 06:29
imo both a and c are false…
a is definately false because the value of the callable bond is equal to the value of the vanilla bond _minus_ the option value
c should also be false because of the reasons above作者: prashantsahni 时间: 2013-4-4 06:31
The question is poor, but A is clearly correct whereas C is conditionally correct.
If the subject bond is trading at a massive discount, say 805, then price movements should be the same between callabales and noncallables when yields rise (or fall) and C will be false. But, assuming that the bond can be called at par and it’s trading very close to par, say 9930, then when yields rise it will experience less price movement than a noncallable so C would be true.
