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CFA Level I · CFA Level I Exam · Fixed-Income Instrument Features

A bond issuer has the right to repurchase its bonds before maturity at a specified price. Relative to an otherwise identical option-free bond, the callable bond most likely trades at a:

A callable bond most likely trades at a lower price than an otherwise identical option-free bond. The issuer holds the call option, which has value, and the investor effectively sells it, so the bond's price equals the option-free price minus the call option's value.

  1. Ahigher price, because the issuer has a valuable right
  2. Blower price, because the investor has granted the issuer a valuable optionCorrect
  3. Cprice equal to the option-free bond, because the call price is fixed in advance

Explanation

A call option benefits the issuer, so the investor must be compensated through a lower price or a higher yield. Callable bond value equals option-free bond value minus call option value. A higher price would favor the investor, which is incorrect.

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