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

An investor buys a fixed-rate bond that includes a call option held by the issuer. Compared with an otherwise identical non-callable bond, the callable bond will most likely trade at a:

The callable bond will most likely trade at a lower price. The issuer holds the call option, which has value to the issuer, so the investor is compensated by paying less than for an identical non-callable bond, or by receiving a higher yield.

  1. Alower price, because the investor has effectively sold the option to the issuerCorrect
  2. Bhigher price, because the issuer pays the investor for call protection
  3. Csame price, because the coupon rate and maturity are identical

Explanation

A call option benefits the issuer, who can redeem the bond when rates fall. The investor bears the cost of this right, so the callable bond's price is the non-callable price minus the option value. A higher price would apply to a putable bond, not a callable one.

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