SIE practice questionmediumPutable Bonds
Investors are most likely to exercise the put option on a bond when:
- ABond prices rise
- BInterest rates fall
- CInterest rates rise above the bond’s coupon rate✓ Correct answer
- DCredit spreads narrow
Explanation
Why C — Interest rates rise above the bond’s coupon rate
When market rates exceed the bond’s coupon, investors put the bond back to the issuer to reinvest at higher rates. They would not put the bond when rates fall or prices rise.
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