Which one of the following is correct?
A) There is an upper bound on a callable bond's price.
B) Callable bond prices are higher than those of comparable straight bonds.
C) The attraction of callable bonds to the issuer increases as interest rates increase.
D) The investor in a callable bond owns the call option.

Question

Quizplus · Accepted Answer

Callable bonds have an upper bound on their prices since the issuer has the option to call them back and retire the bond before maturity if interest rates fall. This call option limits the potential price appreciation of the bond. Option A correctly identifies this feature of callable bonds. Option B is incorrect because callable bonds often trade at a lower price than their straight bond counterparts because of the call option. Option C is incorrect because the issuer's attraction to callable bonds decreases as interest rates increase because the bond becomes less likely to be called. Option D is incorrect because the issuer, not the investor, owns the call option in a callable bond.

Which One of the Following Is Correct