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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities

Which of the following is a feature of a callable bond from the investor's perspective?

In a callable bond the issuer can redeem before maturity, usually when interest rates fall, leaving the investor exposed to reinvestment risk at lower rates. Callable bonds typically offer higher yields as compensation, and their price gains are limited near the call price.

  1. AThe investor can demand early redemption at any time
  2. BThe issuer may redeem it before maturity, creating reinvestment risk for the investorCorrect
  3. CIt always has lower yield than a similar non-callable bond
  4. DIts price rises without limit when interest rates fall

Explanation

A callable bond gives the issuer the right to redeem early, typically when rates fall. The investor then must reinvest at lower rates, which is reinvestment risk. Because of this, callable bonds usually offer higher yields, and their price appreciation is capped near the call price. The right to demand early redemption describes a puttable bond.

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