Schweser Mock: please explain please, through, correct, interest, increase

vagabond

Questions 97 through 110 relate to Fixed Income.

If the volatility of interest rates increases, the prices of a putable bond and a callable bond will most likely:

Putable bond Callable bond



A) Increase Increase


B) Increase Decrease


C) Decrease Increase



Your answer: A was incorrect. The correct answer was B) Increase Decrease


In general, an increase in interest rate volatility increases the values of both put options and call options. A more valuable put option increases the price of a putable bond. A more valuable call option decreases the price of a callable bond.