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CFA Level 2 - Quantitative Methods - Time-Series Analysis
Intermediate
1/5
LMN Inc. has issued a 10-year bond with a face value of $1,000, a coupon rate of 6%, and an embedded call option. The call option allows LMN Inc. to redeem the bond at a price of $1,080 on or after the 7th anniversary of the issue date. If current market interest rates for similar bonds without call options are at 5%, which of the following statements is most accurate regarding the valuation of LMN Inc.'s callable bond?
a.
The value of the callable bond will be higher than a similar non-callable bond because the embedded call option provides additional flexibility to the issuer, which is attractive to potential investors.
b.
The value of the callable bond will be lower than a similar non-callable bond because the call option is valuable to the issuer.
c.
The value of the callable bond will be the same as a similar non-callable bond since the coupon rate is higher than the current market interest rate, making the call option less likely to be exercised by the issuer in the near future.
Intermediate