With any other factors remaining unchanged, which of the following statements regarding bonds is not valid?...

With any other factors remaining unchanged, which of the following statements regarding bonds is not valid?
- The price of a callable bond increases when interest rates increase
- Issuance of a callable bond is equivalent to a short position in a straight bond plus a long call option on the bond price
- The put feature in a puttable bond lowers its yield compared with the yield of an equivalent straight bond
- Duration is a function of time and yield

Solutions

Expert Solution

The price of callable Bond does not increase when the interest rate will increase because there is an inverse relationship between interest rate and the bond prices and when interest rates would be increasing there is no difference between callable Bond and non callable bonds because it is only exercise when the interest rates are falling in the market.

Correct answer will be option (A)the prices of the callable bond increase when interest rate increase.

jeff jeffy answered 2 years ago

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