CFA Level I · CFA Level I Exam · Fixed-Income Instrument Features
A bond contains a provision that allows the issuer to repurchase the bond at a stated price before maturity. Relative to an otherwise identical bond without the provision, the bond with this provision will most likely trade at:
A callable bond most likely trades at a higher yield than an identical non-callable bond. The call option favors the issuer, who can repurchase the bond when rates fall, so investors demand extra yield as compensation for bearing reinvestment and price-appreciation limits.
- Aa higher yieldCorrect
- Bthe same yield
- Ca lower yield
Explanation
A call option benefits the issuer, so investors require compensation in the form of a higher yield (lower price) than for an otherwise identical non-callable bond. A lower yield would apply to a bond with an option favoring the investor, such as a putable bond.
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