Bluetick1010

The call option decreases the bond price because the bond issuer has the option to buy the bond back.

The yield doesn't have to change. You can have two bonds. Bond A is callable at 110 and sells for 90 with yield of 8%. Bond B is not callable and selling for 95 with yield of 8%.

> Say if the call option increases the price of a
> bond because it's more attractive for a bond buyer
> due to the safety the option offers, the the
> graphical inverse relation states that the yield
> will hence go down. But why does the yield have to
> go down in a first place?
>
> If there is a high priced bond that yield low and
> the other cheaper bond that pays higher yield,
> shouldn't I be better off with the lower priced
> bond because I get compensated by the higher
> streams of profit the yield bring?

It can work out to be even. Paying more and getting less should be similar to paying less and getting more.

In the case of the callable bond, both bonds give the same amount, but the callable bond costs less up front because of the risk.