Overview of Embedded Options
If interest rates rise over a period of time to a significant degree, the price of an American-style callable bond, relative to the price of a straight bond with similar features, would fall:
That's right!
The price of a straight bond will be higher than the price of a callable bond with similar features, as the call option has value to the issuer, lowering value for investors. As interest rates rise, exercise of the call option becomes less and less likely, so the two prices should begin to converge as they both fall. This means that the straight bond will lose value faster than the callable bond.
No.
Consider that the straight bond would have at least the same interest rate sensitivity if it contained similar features as the coupon rate and maturity.
Not exactly.
Consider that the callable feature will affect the starting price of the bond relative to that of the straight bond.
more slowly.
more quickly.
at the same rate.
