Reading 63: Understanding Yield Spreads- LOS g～ Q1-2 should, higher, affect, equivalent, name

yangh

 

LOS g: Identify how embedded options affect yield spreads.

Q1. As compared to an equivalent noncallable bond, a callable bond’s yield should be:

A)   higher.

B)   the same.

C)   lower.

 

Q2. As compared to an equivalent nonputable bond, a putable bond’s yield should be:

A)   lower.

B)   the same.

C)   higher.

 

yangh

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Q1. As compared to an equivalent noncallable bond, a callable bond’s yield should be:

A)   higher.

B)   the same.

C)   lower.

Correct answer is A)

A callable bond favors the issuer. Hence, the value of the bond is discounted by the value of the option, which means the yield will be higher.

 

Q2. As compared to an equivalent nonputable bond, a putable bond’s yield should be:

A)   lower.

B)   the same.

C)   higher.

Correct answer is A)

A putable bond favors the buyer (investor). Hence, a premium will be paid for the option, which means the yield will be lower.

erpang8888

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