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CFA Level I · CFA Level I Exam · Yield-Based Bond Convexity and Portfolio Properties

As market yields rise sharply far above a putable bond's coupon rate, the price of the putable bond relative to an otherwise identical option-free bond will most likely:

The putable bond's price will fall by less than the option-free bond's price. Rising yields increase the value of the investor's put option, which gives a price floor near the put price and reduces the bond's sensitivity to higher yields.

  1. AFall by the same amount
  2. BFall by less because the put option gains valueCorrect
  3. CFall by more because the put is exercised and replaced by lower-coupon debt

Explanation

When yields rise, the investor's right to sell at the put price becomes more valuable. This sets a floor on the price, so the putable bond falls less than the option-free bond. Option C reverses the effect of the put.

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