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Basic Question 14 of 15
A bond may include a provision that allows the issuer to retire or call all or part of the issue before the maturity date. From the investor's perspective which of the following is (are) disadvantages to call provisions?
II. The investor is exposed to reinvestment risk as the issuer is likely to call the bonds when interest rates have dropped below the bond's coupon rate.
III. The price appreciation potential of a bond will be reduced relative to an option-free bond.
I. The cash flow pattern is not known with certainty because the bond may be called.
II. The investor is exposed to reinvestment risk as the issuer is likely to call the bonds when interest rates have dropped below the bond's coupon rate.
III. The price appreciation potential of a bond will be reduced relative to an option-free bond.
User Contributed Comments 1
| User | Comment |
|---|---|
| jonan615 | call option = negative convexity |
I was very pleased with your notes and question bank. I especially like the mock exams because it helped to pull everything together.
Martin Rockenfeldt
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.