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

Compared with an otherwise identical option-free bond, a callable bond's price-yield relationship at low yields is most likely:

A callable bond has a flatter price-yield curve with negative convexity at low yields. Falling yields make the issuer's call option valuable, so the price rises more slowly and is capped near the call price, unlike an option-free bond.

  1. AFlatter, with negative convexityCorrect
  2. BSteeper, with greater positive convexity
  3. CIdentical, because the call option does not affect price

Explanation

When yields fall, the issuer is more likely to call the bond, so the price is capped near the call price. The price-yield curve flattens and shows negative convexity. Option B describes a putable bond, and C ignores the embedded option's value.

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