Skip to content

FRM Part I · FRM Exam Part I · Corporate Bonds

A company issues a 10-year callable bond with a coupon of 6%. Compared with an otherwise identical non-callable bond, which statement is correct?

The callable bond is worth less than the equivalent non-callable bond, so it trades at a lower price or higher yield. Bondholders are effectively short a call option to the issuer, who can redeem when rates fall, so investors demand compensation for that risk.

  1. AThe callable bond has a higher price because the issuer holds the option
  2. BThe callable bond has a lower price and typically a higher yield because bondholders have effectively sold a call option to the issuerCorrect
  3. CThe callable bond has the same price because the coupon is identical
  4. DThe callable bond has a lower price because the holder owns a put option on the issuer

Explanation

Callable bond value equals the non-callable bond value minus the value of the call option held by the issuer. Investors therefore pay less, or require a higher yield, to compensate for call risk. The option belongs to the issuer, not the holder.

Did you get it right without looking?

One question tells you little. A timed set on Corporate Bonds shows your real accuracy, how long you take and where you lose marks.

Practise Corporate BondsFree diagnostic mock

More Corporate Bonds questions