Question #69
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
As the volatility of interest rates increases, the value of a callable bond will:
Answer Choices:
A. rise
B. decline
C. rise if the interest rate is below the coupon rate, and fall if the interest rate is above the coupon rate. Explanation As volatility increases, so will the option value, which means the value of a callable bond will decline. Remember that with a callable bond, the investor is short the call option. (Module 27.3, LOS 27.d)
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