A callable bond is exercised when interest rate _____ while a putable bond is exercised when...

Question

Question

A callable bond is exercised when interest rate _____ while a putable bond is exercised when interest rate _______.

Answer 1

Answer #1

A callable bond is exercised when interest rates fall while a puttable bond is exercised when interest rates rise.

If interest rates fall, new bonds can be issued at a lower yield hence a call option is exercised when interest rates fall.

When interest rates rise, investors can invest their funds at higher rates hence they exercise their put options.

Answer 2

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