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

An investor holds a putable bond. The put feature is most likely to be exercised when:

The put is most likely exercised when market interest rates have risen well above the coupon rate. The bond's market price then falls below the put price, typically par, so the holder gains by selling it back to the issuer and reinvesting at the higher prevailing yields.

  1. Amarket interest rates have fallen well below the coupon rate
  2. Bthe issuer's credit quality is unchanged and rates are stable
  3. Cmarket interest rates have risen well above the coupon rateCorrect

Explanation

A put lets the bondholder sell back at the put price, usually par. When market rates rise, bond prices fall below the put price, so the investor sells back and reinvests at higher yields. When rates fall, the bond trades above par and the put is worthless.

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