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Basic Question 2 of 15
Which of the following is NOT a component of call risk for a bond investor?
B. When the issuer calls a bond, the investor is exposed to reinvestment risk.
C. The value of a callable bond drops when expected interest-rate volatility decreases.
D. The capital appreciation potential of a callable bond is lower than a noncallable bond.
A. The cash flow pattern of a callable bond is not known with certainty.
B. When the issuer calls a bond, the investor is exposed to reinvestment risk.
C. The value of a callable bond drops when expected interest-rate volatility decreases.
D. The capital appreciation potential of a callable bond is lower than a noncallable bond.
User Contributed Comments 5
| User | Comment |
|---|---|
| danlan | When volatility decreases, the call option cost increases and value of the callable bond=noncallable bond price-option cost increases |
| mtcfa | No. When volatility decreases, the option cost decreases (ie not worth as much to the issuer). this is good for the investor and therefore the value of the bond increases. Hence, C is false. |
| achu | LESS likely to be called as volatility decreases; thus callabe bond value INCREASES. |
| 2014 | Greater the price volatility, higher the price of option, price of callable bond declines. |
| davidt876 | well these comments are a cluster f... danlan's comment is correct so long as you replace call option cost "increases" with "decreases". mtcfa is right in his answer as well, but the value of the option to the issuer has absolutely nothing to do with the risk to the investor or the price of a bond. when assessing the market value of a bond we are only assessing the cost (or benefeit denoted as a negative cost) to the investor. achu you the man, and 2014 is just exploring the opposite way around (increased volatility). but note the volatility is of the interest rates which in turn affect prices. |
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Learning Outcome Statements
explain how interest rate volatility affects the value of a callable or putable bond;
explain how changes in the level and shape of the yield curve affect the value of a callable or putable bond;
calculate the value of a callable or putable bond from an interest rate tree;
CFA® 2025 Level II Curriculum, Volume 4, Module 28.