Final answer:
A callable bond will sell at a lower price than a non-callable bond due to the risk of being called before maturity, especially in a declining interest rate environment. The price of bonds is inversely related to interest rate changes; bonds with lower coupon rates lose value as market rates rise.
Step-by-step explanation:
When comparing the price of a callable bond to a non-callable bond with the same coupon rates and maturity dates, the callable bond will typically sell at a lower price. This is due to the fact that callable bonds give the issuer the right to redeem the bond before its maturity date, usually when interest rates have declined, so they can reissue debt at a lower cost. This potential action creates more risk for the buyer since the bond's future cash flows are not guaranteed. In contrast, a non-callable bond offers more certainty regarding the interest payments and the return of principal at maturity.
The value of bonds is also influenced by changes in market interest rates. When interest rates rise, the price of existing bonds with lower coupon rates typically decrease because new bonds are likely to be issued with higher coupon rates, making the older bonds less attractive. Conversely, when interest rates fall, the bonds with higher coupon rates issued at previous higher rates become more valuable, and their prices increase.