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CFA Level I · CFA Level I Exam · Fixed-Income Cash Flows and Types

A corporate bond gives the issuer the right to repurchase the bond before maturity at a preset price. Compared with an otherwise identical non-callable bond, the callable bond most likely trades at:

The callable bond most likely trades at a lower price. The issuer holds the call option, and the investor effectively sells it. The callable bond's value is the value of the straight bond minus the call option value, so investors demand a discount or a higher yield.

  1. Aa lower price, because the investor bears call riskCorrect
  2. Bthe same price, because the coupon rate is identical
  3. Ca higher price, because the issuer pays for the right

Explanation

A call option benefits the issuer, so the investor is short the option. The bond's value equals the straight bond value minus the call option value, so the callable bond sells at a lower price or offers a higher yield. A higher price would require the investor to hold the option.

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