Question #34
Reading: Reading 27 Valuation and Analysis of Bonds With Embedded Options - Anwers
PDF File: Reading 27 Valuation and Analysis of Bonds With Embedded Options - Anwers.pdf
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Question
A callable bond and an option-free bond have the same coupon, maturity and rating. The callable bond currently trades at par value. Which of the following lists correctly orders the values of the indicated items from lowest to highest?
Answer Choices:
A. $0, embedded call, callable bond, option-free bond
B. Embedded call, callable bond, $0, option-free bond
C. Embedded call, $0, callable bond, option-free bond. Explanation The embedded call will always have a positive value prior to expiration, and this is especially true if the callable bond trades at par value. Since investors must be compensated for the call feature, the value of the option-free bond must exceed that of a callable bond with the same coupon and maturity and rating. (Module 27.1, LOS 27.b)
No explanation available for this question.