CFA Level I · CFA Level I Exam · Fixed-Income Instrument Features
An investor owns a putable bond and is concerned about rising interest rates. Compared with an otherwise identical non-putable bond, the putable bond will most likely exhibit:
A putable bond will most likely show a smaller price decline when rates rise. The investor's right to sell the bond back at a fixed price sets a floor under its value, and the put gains value as rates increase, cushioning the loss.
- Agreater price decline when rates rise
- Bidentical price change when rates rise
- Csmaller price decline when rates riseCorrect
Explanation
The put option lets the investor sell the bond back at a set price, creating a floor on its value. When rates rise, the put becomes more valuable, so the putable bond falls less than a comparable non-putable bond.
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