Question

Which of the following statements is FALSE?

A) A callable bond will trade at a lower price (and therefore a higher yield)than an otherwise equivalent non-callable bond.
B)The price of a callable bond can be low when yields are high, but does not rise above the call value when the yield is low.
C) Before the call date, investors anticipate the optimal strategy that the issuer will follow, and the bond price reflects this strategy.
D)The yield to maturity of a callable bond is calculated as if the bond were called at the earliest opportunity.

Answer 1

D)The yield to maturity of a callable bond is calculated as if the bond were called at the earliest opportunity.

Step-by-step explanation:

The callable bond should be trade at the less price so it would generate the high return as compared with the non-callable bond. Whenever it is low it generated the high return but it could not increase over and above to the call value at the time when the yield is less. Also prior to the call date the investors expected that the issuer would follow and the price of the bond represent the given strategy

but the yield to maturity should not be measured at the time when the bond can be called

Therefore d option should be considered