Final answer:
The presence of an embedded put option decreases the bond's price by reducing the risk associated with holding the bond.
Step-by-step explanation:
The correct answer is b) Decreases the bond's price. The presence of an embedded put option in a bond allows the bondholder to sell the bond back to the issuer at a specified price. This put option increases the bondholder's ability to exit the investment early, which reduces the risk associated with holding the bond. As a result, the presence of a put option decreases the bond's price.
For example, if two bonds with the same credit risk and market conditions are being compared and one bond has an embedded put option while the other does not, the bond with the put option will be priced lower because it offers the bondholder more flexibility and lower risk.