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CFA Level 1 - Fixed Income - Valuation of Bonds with Embedded Options
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Which of the following best describes the impact of an embedded put option on the value and risk of a bond?
a.
An embedded put option decreases the value of the bond and increases its risk as it gives the issuer the right to redeem the bond before maturity, introducing prepayment risk for the bondholder
b.
An embedded put option increases the value of the bond but also amplifies its risk due to the potential for the bondholder to exercise the option and force the issuer to repurchase the bond at an unfavorable price
c.
An embedded put option increases the value of the bond and reduces its risk by providing the bondholder the right to sell the bond back to the issuer at a predetermined price
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