Final answer:
Callable bonds tend to offer a higher yield than option-free bonds, Treasury bonds, or convertible bonds to compensate for the risk of the bond being called before maturity.
Step-by-step explanation:
When comparing different types of bonds, higher yields are generally offered to compensate for higher risks or inconveniences to bondholders. A callable bond is more likely to offer a higher yield than an option-free bond. This is because callable bonds give the issuer the right to redeem the bond before maturity, which can be disadvantageous to bondholders if interest rates decline. Consequently, investors demand a higher yield for taking on this callable risk. In contrast, Treasury bonds are considered low-risk as they are backed by the U.S. government, and thus tend to offer lower yields. Convertible bonds and zero-coupon bonds have different risk and reward profiles but are not inherently higher-yielding than option-free bonds.
Convertible bonds offer the option to convert into equity, which can be favorable in certain conditions, potentially leading to a lower yield than a pure debt instrument. Zero-coupon bonds do not make periodic interest payments and are sold at a discount, with their yield being determined by the difference between the purchase price and the par value at maturity.