A callable bond should be priced the same as
A) a convertible bond.
B) a straight bond plus a put option.
C) a straight bond plus a call option.
D) a straight bond plus warrants.
E) a straight bond.

Question

Quizplus · Accepted Answer

A callable bond is essentially a straight bond (a bond without any special features) combined with a call option that the issuer holds. This call option gives the issuer the right, but not the obligation, to repurchase the bond at a predetermined price before maturity. This feature is beneficial to the issuer, allowing them to refinance the bond at a lower interest rate if market conditions are favorable. Therefore, the correct pricing model for a callable bond is to consider it as a straight bond plus a call option.

A Callable Bond Should Be Priced the Same as