Q. Compared with an otherwise identical option-free bond, when interest rates fall, the price of a callable bond will:
- rise more.
- fall less.
- rise less.
C is correct. When interest rates fall, the price of the embedded call option increases. The price of a callable bond equals the price of an option-free bond minus the price of the embedded call option. The price of the callable bond will not increase as much as an option-free bond because the price of the call option is increasing. As interest rates fall, the bond is more likely to be called, limiting the upside price increase potential.
老师，官方答案里面没有太懂其含义。能否简单的回答一下？谢谢!
