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

An investor in a bond with a put option held by the bondholder would most likely exercise the option when:

The investor would most likely exercise the put when market interest rates rise above the coupon rate. The bond's market price then falls below the put price, so selling it back at the set price and reinvesting at higher yields is advantageous.

  1. Amarket interest rates have fallen below the coupon rate
  2. Bthe issuer's credit quality has improved sharply
  3. Cmarket interest rates have risen above the coupon rateCorrect

Explanation

A putable bond lets the holder sell it back at a set price. When market rates rise above the coupon, the bond's market value falls below the put price, so the holder exercises and reinvests at higher rates. Falling rates or improved credit raise the bond's value, making exercise unattractive.

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